You Give Trusts a Bad Name – Property Protection Trusts: Understanding the Myths, Risks and Legal Realities

Property Protection Trusts, Family Asset Protection Trusts and Home Protection Trusts are frequently marketed as a way to protect assets, avoid care home fees and reduce inheritance tax. While trusts can be valuable estate planning tools, many arrangements are misunderstood or promoted with unrealistic promises.

Over the years, homeowners have been told that placing their property into trust will automatically protect it from local authorities, remove it from their estate after seven years, or guarantee inheritance tax savings. In reality, UK trust law, inheritance tax legislation and care fee assessment rules are far more complex.

Before creating any trust, it is important to understand how HM Revenue & Customs (HMRC), local authorities and the courts assess these arrangements. In this article, we explore the most common myths surrounding Property Protection Trusts and explain the potential inheritance tax, capital gains tax and care home fee implications.

The Seven-Year Rule: Myth or Reality?

One of the most common sales claims is:

“If you survive seven years after putting your home into trust, it is outside your estate.”

That statement is often incomplete or misleading.

Many transfers into trust are treated as “Chargeable Lifetime Transfers” under the Inheritance Tax Act 1984. Depending on the value of the home and earlier gifts, there can be immediate inheritance tax consequences.

Even if the settlor survives seven years:

• the trust may still use up the Nil Rate Band;
• the Residence Nil Rate Band may be lost;
• HMRC may still treat the property as remaining in the estate under the “Gift With Reservation” rules; and
• Pre-Owned Asset Tax (“POAT”) can sometimes apply.

The law in this area has become steadily stricter over time, particularly following anti-avoidance legislation introduced after arrangements such as those considered in:

• IRC v Eversden [2003] EWCA Civ 668;
• Finance Act 2004 (POAT rules);
• continuing HMRC enforcement guidance in the IHT Manual.

Recent HMRC guidance continues to emphasise that simply signing documents is not enough if the person still enjoys the property in practice.

Gift With Reservation Rules: Why Living in the Property Matters

This is usually the biggest problem.

Many people transfer their home into trust but continue:

• living there rent free;
• paying household expenses as before;
• controlling the property;
• acting as trustee; or
• treating the property as their own.

Under the “Gift With Reservation of Benefit” rules (Finance Act 1986), HMRC can argue that the gift never really worked for inheritance tax purposes.

In simple terms:

If you give the house away but continue to enjoy significant benefits from it, HMRC may argue that the property remains part of your estate for inheritance tax purposes.

Cases such as Buzzoni v HMRC [2013] EWCA Civ 1684 demonstrate that HMRC and the courts look at the practical reality, not just the paperwork.

Care Home Fees and Deliberate Deprivation of Assets

Another common claim is:

“The council cannot touch your house after seven years.”

There is no seven-year rule in care fee legislation.

Under the Care Act 2014 and the Care and Support Statutory Guidance, local authorities can investigate whether somebody deliberately deprived themselves of assets to reduce care fees.

There is no fixed time limit.

A council can look back many years and ask:

• Was avoiding care fees a significant reason for the transfer?
• Was future care reasonably foreseeable?

If the answer is yes, the authority may still assess the person as owning the asset.

This is called “notional capital”.

Cases and Ombudsman decisions continue to support councils where evidence shows the trust was marketed mainly as care-fee avoidance.

Important authorities include:

• Yule v South Lanarkshire Council [1999] SLT 490;
• Local Government and Social Care Ombudsman decisions involving deprivation findings;
• Care and Support Statutory Guidance, Annex E.

Recent guidance from local authorities also shows increasing scrutiny of mass-marketed “asset protection” schemes sold to elderly homeowners.

How Property Protection Trusts Can Affect the Residence Nil Rate Band

Since the introduction of the Residence Nil Rate Band (“RNRB”), many older trust structures have become less attractive.

The RNRB is an additional inheritance tax allowance available where a home passes to direct descendants.

However, some lifetime trust arrangements can accidentally:

• reduce the available RNRB; or
• eliminate it entirely.

Many clients were sold trust arrangements before the RNRB existed and were never advised to review them afterward.

This has become increasingly important because the current inheritance tax thresholds remain frozen until at least 2030, meaning more estates are exposed to tax through “fiscal drag”.

Capital Gains Tax Risks Associated with Trusts

People are often told about inheritance tax savings but not about Capital Gains Tax (“CGT”).

If trustees later sell the property:

• Private Residence Relief may not apply in full;
• trustees receive a much smaller CGT annual exemption than individuals; and
• gains may be taxed at residential property rates.

The result can be an unexpected tax bill that would never have arisen had the property remained personally owned.

HMRC Scrutiny of Asset Protection Trust Schemes

The overall direction of travel in recent years has been clear:

• HMRC has become increasingly hostile toward artificial “home protection” arrangements;
• local authorities may investigate historic transfers where questions arise regarding deliberate deprivation of assets;
• courts increasingly focus on substance over form;
• regulators, local authorities and consumer protection bodies have raised concerns about some marketing practices associated with unregulated estate planning schemes.

There has also been growing public concern about:

• unregulated will-writing businesses;
• commission-driven trust sales;
• elderly clients being pressured into unnecessary structures;
• poor drafting of trust documents.

In many cases, the trust itself is not defective – the real issue is that it was sold with unrealistic promises.

When Trusts Are Appropriate for Estate Planning

Trusts remain important and legitimate legal tools.

They can still be extremely useful for:

• protecting vulnerable beneficiaries;
• second marriages;
• succession planning;
• tax planning in appropriate circumstances;
• business and agricultural property planning.

But a trust should exist because it solves a genuine legal or family problem – not because somebody promised that “the council can never touch your home”.

If a trust arrangement sounds too good to be true, it usually deserves very careful scrutiny.

Tax treatment depends on individual circumstances and legislation may change. The information in this article is intended as general guidance only and should not be relied upon as legal or tax advice.

Trusts Can Be Effective, But They Need the Right Advice

Property Protection Trusts are not inherently problematic. When used appropriately, trusts can support succession planning, protect vulnerable beneficiaries, preserve family wealth and assist with certain estate planning objectives.

However, trusts should never be established solely because of claims that they will automatically avoid care home fees, eliminate inheritance tax or place assets beyond the reach of HMRC or local authorities. These arrangements require careful legal and tax advice tailored to your circumstances.

If you already have a Property Protection Trust, Family Asset Protection Trust or Home Protection Trust, it may be sensible to review whether it remains effective in light of changes to inheritance tax rules, the Residence Nil Rate Band and HMRC guidance.

RLK Solicitors’ Estate Planning team advises individuals and families on trusts, wills, inheritance tax planning, probate and succession planning. We can help you understand the implications of an existing trust or advise whether a trust structure is appropriate for your circumstances.

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To discuss trusts, inheritance tax planning or estate planning, contact our team today for tailored legal advice.