Lifetime planning – PPPT & other CTT Probate Trusts

Lifetime planning – the basics

Using trusts on a client’s death can be a very useful planning tool, but what about establishing trusts during a client’s lifetime? Lifetime trusts can provide benefits for the clients themselves, as well as their beneficiaries on death.

CTT offer many different lifetime trusts options that can be used to tackle a wide range of client concerns. For example:

1. Tax planning
2. Asset protection during lifetime and post death
3. To ease the burden of administration
4. Gifting without giving up control

This article will focus on settlor interested, or probate, trusts. As the names suggest, with these types of trusts you will see the Settlor as a beneficiary of the trust, meaning they can still derive a benefit from the asset they transfer to the trust. Whilst this is not effective for IHT purposes (as it will fall under the GROB rules), it can be beneficial for clients wanting to add a layer of protection over their assets during their lifetime, and make administration easier post death. A common example here is a client wanting to protect their main residence against potential threats, but still residing in the property.

The Family Probate Preservation Plus Trust (PPPT)

The PPPT is a form of lifetime trust that is specifically designed to hold a client’s main residence. This trust utilises the best parts of different types of trusts (discretionary, IIP & bare) to create a one stop solution that meets a wide variety of client concerns!

The PPPT is used for control, succession and protection. Not only does it offer a layer of potential protection over a client’s main residence against third party threats that they may face, it’s also a useful tool for generational IHT planning and clients with vulnerable beneficiaries they want to protect. Additionally, the PPPT can help to ease the burden of administration once the client has passed away, by bypassing the probate process and allowing beneficiaries to realise their inheritance sooner.

It is worth keeping in mind that the PPPT is a settlor interested trust, meaning it is IHT neutral. As the settlor will be a beneficiary and continue to reside in the property, this gift to trust will be caught by the GROB rules and therefore the value will remain in the settlor’s estates for IHT purposes.

Potential issues VS the CTT solution!

Chargeable Lifetime Transfers (CLTs)

A CLT is an immediate charge to IHT which is applicable for transfers into trust that are above the client’s available NRB, meaning gifts under this value will have no immediate tax charge. However, this will utilise the client’s NRB until it replenishes after 7 years, meaning extra consideration needs to be taken when thinking about any previous gifts the client has made. Transfers above the clients NRB will give rise to an immediate entry charge of 20%.

So, what happens if a client ‘forgets’ or doesn’t make you aware of their gifting history? Reduced NRBs and CLTs can be an issue with regular asset protection style trusts!

Let’s look at an example. You set up an asset protection trust for Mrs Smith in 2022 and settle £300,000 of property into the trust. This transfer is under the client’s NRB of £325,000 so there will be no immediate tax charge… right?

But what the client didn’t tell you was that back in 2021, they also settled £200k of cash into a different asset protection trust with another provider.

As this transfer is within 7 years, you get a cumulative total of £500,000 worth of transfers to trust within a 7-year period.

Looking at a quick calculation:

• £500,000 – £325,000 (NRB) = £175,000
• £175,000 x 20% = £35,000 of tax to pay!

What is even worse is this is often not discovered until the client passes away, and the executors are applying for probate, meaning not only is there the tax to pay, but also years’ worth of interest and penalties, reducing their loved ones’ inheritance further!

The CTT solution

The CTT solution to this problem is something referred to as the ‘Deed of Magic’ which is written into the PPPT. This ‘Deed of Magic’ allows transfers to trust of any value, without giving rise to immediate tax charges, even if previous transfers have been made that you aren’t aware of.

Of course, it is still essential to have in depth conversations with your clients to understand their history and provide the best estate planning advice, as the PPPT will not be suitable for all clients.

The ‘Deed of Magic’ works by ensuring that no more than the clients available NRB at the date of transfer can be settled upon the discretionary element of the trust. The clause sets out that the value up to the available NRB shall be held in ‘Fund A’ which is the discretionary element, and anything above this value, including any growth, will be held on ‘Fund B’, a bare trust for the settlor absolutely.

Let’s look at the same example as above, but where the PPPT has been established instead. If in 2021 the client transferred £200,000 to an asset protection trust and in 2022, they transfer their £300,000 main residence into a PPPT, although the cumulative total in the 7-year period is above the NRB, there will be no tax to pay:

• The transfer in 2021 reduces the client’s NRB to £125,000
• Therefore, on transfer to the PPPT, £125,000 worth of property is held on discretionary terms
• The remaining £175,000 is held on bare trust for the settlor absolutely, and so not subject to CLTs
• = £0 tax to pay!

Periodic charges

Discretionary trusts are subject to the relevant property regime and as such periodic charges can apply on the 10-year anniversaries of a trust being established. Periodic charges are taxed at a maximum of 6% on the value of assets above the NRB.

It may be that on entry, the value of the property being transferred to trust was below the NRB, but what happens when the asset increases in value?

Let’s look at another example. In 2022, a client settled her £300,000 main residence into an ordinary asset protection trust. At the 10-year anniversary in 2032, the trustees asses the current value of the property for the periodic charge review, and find that is has increased in value to £380,000 meaning a periodic tax charge will apply:

• £380,000 – £325,000 (NRB) = £55,000
• £55,000 x 6% = £3,300 tax to pay!

Often with asset protection trusts, it’s only property that is settled meaning there are no liquid assets available to settle this liability. This can put the settlor in a difficult position to find funds!

The CTT solution

As above, the CTT solution is again rooted in the inclusion of the ‘Deed of Magic’ within the PPPT. As explained, this limits the value held on discretionary terms to the clients available NRB, with any excess being held on bare trust for the settlor absolutely, which includes any growth, meaning it is not subject to relevant property charges.

This results in a property worth more than the NRB being able to be held in the PPPT and reap the benefits, without suffering these tax charges along the way!

Using the example above, if in 2022 £300,000 worth of property was settled into a PPPT and at the 10-year anniversary in 2032 this had grown to £380,000, the additional £25,000 would be held on discretionary trust to max out the available NRB, and the remaining £55,000 would be held on bare trust, meaning no periodic charges apply.

It’s worth noting that although no tax is payable, if assets exceed 80% of the NRB that is applicable to the trust, then this is still reportable to HMRC.

However, does this not mean that the ‘excess growth’ is now at risk from the settlor’s circumstances? Consider the ‘part share’ valuation of the property. Valuing joint interests in land is excluded by The Care Act 2014 and supporting guidance, so when considering what a willing buyer would pay for a share of a property, this could well be nil.

To recap, this means the PPPT will suffer no Entry, Periodic or Exit charges.

IHT on 1^st death – Non CTT trusts and the loss of the RNRB

A key consideration when reviewing client’s planning where they have already established an asset protection style trust for their main residence is the impact this will have on their future IHT liability.

Where a client’s main residence is fixed in trust, this can lead to the loss of the Residence Nil Rate Band (RNRB) as for the RNRB to be available, the ‘qualifying residential interest’ needs to be passed to (or on IPDI for) lineal descendants via the client’s will, which won’t happen if the property is owned by the trust, not the individual.

For example, a client owns a property worth £250,000 and they settle this into an asset protection trust. By the time the client passes away, the property has grown in value to £500,000. As the property is held in the trust, it will not pass via her will, however as it’s considered a GROB, the value will still form part of the estate for IHT purposes.

This will lead to IHT becoming payable on first death. Using the figures above:

• £500,000 – £325,000 (NRB) = £175,000
• £175,000 x 40% = £70,000 of IHT payable on death.

This huge tax bill could have been avoided with the correct planning!

The CTT solution

Not only can the ‘Deed of Magic’ assist here too as the value that sits on the bare trust element is held for the settlor absolutely and so will pass on their death via their will, enabling a potential claim for the RNRB, but the PPPT also comes with a further document called a Trustee Resolution.

The Trustee Resolution acts to end the trust a day prior to the death of the settlor and essentially transfers the whole of the trust property to be held on bare trust for the settlor.

This means that on death, the property reverts back to the settlor’s estate and can pass via their will (ideally to an appropriately drafted will that utilises further trust planning) meaning that the RNRB can be claimed on death should the other criteria be met, which can significantly reduce a client’s IHT liability.

Let’s look at same scenario as above, but this time the client established a PPPT instead. On the death of the client, the Trustee Resolution kicks in and whole property passes through the will:

• £500,000 – £325,000 (NRB) = £175,000
• £175,000 – £175,000 (RNRB) = £0
• £0 x 40% = £0 IHT to pay!

Other CTT Probate Trusts

Depending on your client’s concerns and they assets that they own, a different CTT probate trust may be more suitable.

For clients that have investments or lump sums and want to reap the benefits of a lifetime trust, the Family Investment Probate Trust (FIPT) can help! This is structured similarly to the PPPT and so has all of the best elements included to provide a great solution to address client concerns!

The FIPT suffers no entry, periodic or exit charges and is great for clients looking for protection, to bypass the probate process while allowing the settlor to benefit and to retain control over the assets.

The Additional Property Probate Trust is also available for clients looking to establish planning for additional properties they own, whilst still benefiting from the income. However, careful consideration should be given to implications for CGT when planning with properties that are not the client’s main residence.

If you need any assistance in regard to your client’s circumstances, or if you are looking for help more generally, please get in touch with the Estate Planning Team for further guidance and support.