What is a Property Protection Trust?
The Property Protection Trust (PPT) is a type of Life Interest Trust incorporated into a Will. It allows the testator to give a lifetime interest in their share of the main residence (or the whole beneficial interest in the main residence if this is solely owned) to a beneficiary of their choice, who is then known as the life tenant. The testator also chooses other beneficiaries at this time, who are known as the remaindermen.
The life tenant will never own the property (or share) absolutely; instead, they have the right to lifetime enjoyment of the property and any income that may arise from it. This means that they have the right to live in the property or, if the property is rented out, to take any rental income as it arises.
When the life tenant’s life interest ends – either when they die or when the trust is terminated by agreement – then the property share passes absolutely to the remaindermen beneficiaries. Commonly, these are the testator’s children.
In what circumstances would you advise a PPT?
Disinheritance: if one spouse or partner dies and leaves their share of the home absolutely to the survivor, it is common for children of both or either party to become disinherited. This happens when the surviving partner remarries (an act which invalidates any outstanding will) and either neglects to create a new will or chooses to benefit their new family. This a particular concern for ‘blended’ families, where either or both partners have children from a previous relationship. However, it could affect any couple.
Care fee planning: With the residential home often being clients’ main asset, passing this on to chosen beneficiaries is often a high priority. Once a share of a property has been passed to a surviving spouse or partner, however, there is nothing to stop the entire property value from being included in a care fee assessment should the survivor require long-term care in the future. With a PPT will, however, the share of the first to die is instead ring-fenced in trust. If the survivor then requires care, the deceased’s share of the property should not be assessed as part of their estate for care fee purposes, though they still retain the right to live in the full property and take any rent generated.
Key features of the PPT
The PPT provides a lifetime interest in the main residence or a share of the main residence for the chosen life tenant. When the life tenant passes away, the property (share) passes to designated remaindermen beneficiaries.
At least two trustees are required. Careful thought should be made as to who may be the most appropriate as they will have to work harmoniously with each other and the life tenant. The life tenant can also be a trustee.
The PPT is only for one property (or share). If a client is interested in protecting more than one property, then you should consider the Flexible Life Interest Trust instead.
he life tenant never owns the property held in trust absolutely and has no right to dispose of the property.
The property held in trust is guaranteed to pass to the ‘remaindermen’ beneficiaries, who are named in the will that created the PPT.
The PPT provides powers for the life tenant, with the joint agreement of the trustees, to sell the property and buy another to be held under the same trust terms. This is useful as clients get older, as they may want to downsize. Any surplus cash from a sale and purchase will be held in trust until the death of the life tenant. Moving to a more expensive property is possible, but the life tenant would have to contribute the additional funds required.
The life tenant is responsible to keep the property in repair, to keep it insured and to pay all outgoings for it.
The life interest trust can be terminated before the death of the life tenant only with the agreement of the life tenant and the trustees. The trust funds would then be distributed to remaindermen beneficiaries.
Legal work will be required set the trust up and arrange the transfer on first death. This will incur extra costs.
In order to transfer the property into trustees’ name at the probate stage, there must be no outstanding mortgage. Clients with an outstanding mortgage who wish to opt for PPT planning should ensure that sufficient funds will be available to the estate to settle this liability on death (e.g. through life assurance).
Tax Treatment
Assets passing into a PPT will be chargeable to IHT unless the life tenant is an exempt beneficiary, like a spouse or civil partner. If the life tenant is not a spouse or civil partner, then IHT will be payable on the assets passing into trust on first death.
Any assets held in a PPT will form part of the life tenant’s estate, for IHT purposes, when they die, as the trust creates an interest in possession. Be careful to note whether the trust fund aggregating with the survivor’s estate will cause their estate to exceed the available nil rate band(s).
Where the life tenant is not a spouse or civil partner, the two points above mean that tax may be paid on the property twice before it reaches the hands of the remaindermen: once on first death as assets pass into the PPT and once on second death, when the trust assets aggregate with the survivor’s estate and pass to the remaindermen.
For married couples and civil partners, the PPT is tax neutral from the perspective of the residence nil rate band (RNRB) provided that the remaindermen are lineal descendants of the life tenant.
For unmarried couples and cohabiting partners, the RNRB of one or even both partners may be lost, depending on the circumstances. If you have clients with taxable estates who fall into this category, please contact APS for more information.
Income generated by the trust (e.g. from rental of the property) will be taxed at the personal income tax rate of the life tenant.
