Property Protection - Don't Lose It!

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Life Interest Trusts can be an effective tool in mitigating care fees by protecting part of the value of a jointly owned property.

When a property is placed in a life interest trust, the trust grants the beneficiary (often a surviving spouse or partner) the right to live in the property or receive income generated from it for the rest of their life.

After their death, the property passes to other beneficiaries, typically children. 

A common question I tend to get asked when preparing a Will for a client, is “How can I protect my property from being used on care fees?”

As a society we are all living longer, which means it is more likely than ever that we may need some sort of care in the future. In England, if you are deemed to require residential care, then the Local Authority will carry out a financial assessment to determine how much, if any, of your care you will pay yourself. Your property is likely to be your main asset and it is normally what clients want to protect the most. 

Clients ask me whether they can simply transfer their property now to their children to try and guarantee that they receive something when they die. It can be done but unfortunately, this can create more problems than it solves! 

For example, from an inheritance tax point of view the property would also still remain in your estate for tax purposes if you continue to live in the property rent free after you have transferred it to your children. This would be something known as a Gift with Reservation of Benefit. 

It is also likely when the property is sold your children will be stung with a capital gains tax bill on the difference between the value of the property when you gave it way and the value that it sells for.  This tax can be 18% or 28% of the gain, which can therefore be a substantial payment.

Should your child go through a divorce or bankruptcy, the property would belong to them and would therefore be vulnerable and taken into account when any settlement is made. If the property needs to be sold, this will mean that you would no longer be able to live in it. 

There are also the Deliberate Deprivation of Assets rules that need to be considered.  This is where you have deliberately reduced your assets to limit what is available to pay for your care. 

This can be a very complex area which I will not go into in any great detail now, however, in general terms, the Local Authority must demonstrate that at the time of the transfer of the asset, you would have known you may need care and your intention for the transfer is to avoid paying for your own care.   

So, after all of that, you might be thinking that it is a lost cause. However, if you jointly own a property with your spouse/partner, there is something we can do to protect half of the value of the property. 

You can create a life interest trust in your Will.  

Instead of leaving your share of the property to your spouse/partner outright, you instead give them a life interest in it. This means they can live in the property for the rest of their life, but you will have the comfort of knowing that your share held in the trust will pass to your chosen beneficiaries when your spouse/partner then dies. 

So, how does the trust save it from being used on their care?

When the survivor of you has a financial assessment carried out by the Local Authority, because they do not own your share of the property, but simply have the right to benefit from it for their lifetime, based on the current rules, it cannot be used to pay for their care. The survivor’s share will however still be able to be used because they own this outright.

The trust also has the advantage that it should avoid the capital gains tax issue, as even though the survivor doesn’t own the deceased share of the property out right they should still be able to claim tax relief on the gain as they are living in the property.

With this option you also have the benefit of knowing that half of the value has been safeguarded for your beneficiaries, whilst knowing that the survivor would be receiving a good standard of care because this would be privately funded. As we all know, social care is grossly underfunded, and it will be interesting to see what changes the Government implements in the upcoming years. 

If you would like to to discuss this further, on a no obligation basis, please feel free to call us on 01452 543498

Traditionally our costs for this, inclusive of producing new Life Interest Trust Wills and any remedial work required by HM Land Registry would be £450-500 in total.