Lifetime Property Protection Trust

Often Known as an 'asset protection trust' the lifetime property protection trust (LPPT) is a lifetime settlement used to provide for a surviving spouse and future generations by protecting the family home from third party creditors, sideways disinheritance and potential claims under the divorce or bankruptcy of a beneficiary. Furthermore probate fees can be mitigated or avoided all together as the asset within the trust are not treated as part of the estate for probate purposes. The LPPT also affords against protection against any potential claim under the Inheritance Family Provisions Act (1975) legislation following the death of the settlor. 

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How does it work?

The family home is transferred to a trust by the owner (‘the Settlor(s)’) with them having a lifetime interest right to reside in it until they die. Then at that point the family home is held on discretionary trust for the named beneficiaries (usually the Settlor(s) children) with the option to leave the family home in the trust and receive the income it generates and continue to keep the capital protected.

Are there any downsides to the LPPT?

The Settlor(s) is effectively giving away what may be their only asset so careful consideration of whether this is the right decision is paramount. Being joint owners or having a mortgage does not rule out taking out this trust. However even though the Settlor(s) can still live in the family home rent free, they no longer have access to the capital, limiting the Settlor(s) the freedom to be able to just sell the property without getting the trustees to buy another one on the same trust terms i.e the trustees can sell the family home and buy another one in which the Settlor(s) can live. Any surplus sale proceeds will belong to the LPPT but any income produced by those surplus sale proceeds will belong to the Settlor(s), who should declare the income on their tax return. The trustees however have an overriding power of appointment in favour of the Settlor(s) and could choose to transfer all or part of the sale proceeds to the Settlor outright if they needed it.

Aside from that the Settlor(s) can continue to live in the family home in the normal way, maintaining the property, insuring it, paying the council tax and all the utility bills in their names. So effectively treating it like they still owned it although the legal title on the Land Register will have the names of the trustees owning it.

Are there any Inheritance Tax Benefits?

Transferring the family home to a LPPT does not mitigate a taxable charge should the Settlor(s) be over their exempt transfer IHT allowance (currently £325,00 each) as it is seen as a gift with a reservation of benefit (GROB) i.e. the Settlor(s) are continuing to live in the property and therefore still have an interest in the asset. Additionally if the family home has a higher value than the IHT allowance, IHT will be payable at the time of transfer.

What about Capital Gains?

Relief from capital gains tax (CGT) is available at the time the Family home is transferred to the LPPT and remains available under principal private residence relief (‘PPR’) all the while the Settlor(s) occupy and also up to three years after both have ceased occupation. Additionally should then the trustees allow one or more beneficiaries to become occupiers then the PPR will again become available ensuring no CGT would be due at any time.