Asset protection trusts have recently come back into the spotlight following media coverage, including Jack Simpson’s article in The Times.
Asset protection trusts are often promoted as a way to safeguard wealth for future generations and, in some cases, to mitigate exposure to care home fees. They are not a specific type of trust but rather a marketing term and are presented as pre-packaged solutions . While the trusts have a legitimate role within a carefully considered estate plan, they are not without risk, particularly when it comes to inheritance tax consequences that may not be fully understood at the outset.
At Nockolds Solicitors Limited, we regularly advise clients who are surprised to discover that trusts created with the best of intentions can, in some cases, lead to additional tax charges and the loss of valuable tax reliefs.
This article highlights two key areas of concern: relevant property trust charges, including the ten-year anniversary charge, and the possible loss of the residence nil rate band (RNRB).
Why the Type of Trust Matters
Often these types of a trust created after 22 March 2006 are likely to fall within the “relevant property trust regime” for inheritance tax purposes.
This classification is important because it brings its own inheritance tax regime. In our experience, many clients who have put asset protection trusts in place have not been fully advised on the long-term tax implications at the outset.
Three Potential IHT Charge Events for Relevant Property Trusts
- The Entry Charge
Relevant property trusts can be subject to an entry charge when assets are transferred into them. In practice, this is not always the main concern when an “asset protection” trust is established, as the value transferred is often kept within the available inheritance tax nil rate band, which has remained at £325,000 since 6 April 2009. Where this applies, no immediate inheritance tax may arise on creation. However, this can create the impression that the trust is tax-efficient, without fully considering the longer-term exposure to ten-year anniversary and exit charges.
- The Ten-Year Anniversary Charge: An Ongoing Tax Liability
After the entry charge, the next key inheritance tax consideration is the ten-year anniversary charge, which is often where the more significant long-term tax impact arises. On every tenth anniversary of the trust, the trustees must assess the value of the trust fund. If its value exceeds the available nil rate band, an inheritance tax charge may arise. Where the trust’s principal asset is the family home, finding funds to meet that liability can be particularly difficult.
- The Exit Charge: Tax on Distributions from the Trust
In addition to the ten-year anniversary charge, inheritance tax exit charges may also arise when assets leave a relevant property trust; for example a house or the sales proceeds of a house are given outright to a beneficiary.
The Loss of the Residence Nil Rate Band
Another significant and often overlooked consequence is the possible loss of the inheritance tax residence nil rate band (RNRB). This is an additional inheritance tax allowance, currently up to £175,000 per person, which may be available when qualifying residential property is left to direct descendants such as children or grandchildren.
When combined with the standard nil rate band, this can allow a married couple or civil partners to pass on up to £1 million free of inheritance tax, depending on their circumstances.
How can a trust affect the RNRB?
Placing a home into an “asset protection” trust can affect eligibility for the RNRB, because the property may no longer form part of the estate in the right way for the relief to apply on death, while the wider value of the arrangement may still be relevant for inheritance tax purposes.
Losing the RNRB can increase the inheritance tax payable by up to £70,000 per person, or up to £140,000 for a couple, depending on the value of the estate and the reliefs otherwise available.
For many families, this may outweigh the perceived benefit of placing the property into trust in the first place. It is therefore important to consider the wider inheritance tax position before any arrangement is put in place.
Can anything be done?
If you have already set up an “asset protection” trust, it is sensible to review the arrangement in the context of your wider estate planning and tax position. In some cases, it may be possible to restructure or unwind the arrangement to avoid unintended tax consequences.
Why tailored advice matters
Many “asset protection” trusts are presented as pre-packaged products by unregulated and uninsured providers, without full consideration of the client’s wider estate or a clear understanding of the interaction between trust law and tax legislation.
When used appropriately and in the right circumstances, trusts remain a valuable and effective estate planning tool. The key is to ensure that the structure reflects your objectives and is supported by clear, informed advice.
At Nockolds Solicitors, our experienced Wills and Probate team can help ensure that:
- any trust arrangement is appropriate for your individual circumstances
- the tax consequences are clearly explained and understood
- asset protection strategies are balanced against your wider estate planning objectives