Tax implications from removing my main residence from the Lifetime Property Trust

GDB2222

https://forums.moneysavingexpert.com/discussion/comment/81954533#Comment_81954533

One of the problems with asset protection trusts in general is that they solve one problem, but create others and I suspect that's not always properly explained to people. Your house was transferred into a trust, and trusts are subject to a tax regime which is completely different from your own tax regime. You can't really argue it's unfair because it's the tax regime that applies to trusts, but you should have understood what you were getting into.

It is possible that you were misadvised when you set up your trust and you may want to sue!

I don't understand how the periodic IHT charge went unpaid in 2022, if it was due then. Very worrying as there may be penalties and interest to pay.

poseidon1

https://forums.moneysavingexpert.com/discussion/comment/81954597#Comment_81954597

These Will writing trust companies are an absolute menace. They are not regulated either by the SRA or licensed to provide legal services, and more often than not have scant knowledge of the very complicated tax landscape that has evolved for trusts since March 2006.

It is as well to point out that the OP's type of trust would not have been caught by the IHT rules which largely only applied to discretionary trusts prior to the substantial legislative changes to the trust IHT regime in 2006. The creation of new life interest trusts after March 2006 then attracted the same IHT treatment as discretionary trusts, but I suspect many of the unregulated will writing/trust companies remained oblivious to these changes for many years after 2006, with consequent adverse implications for their unsuspecting clients.

I do hope the OP's lawyer finds just cause to sue the firm for the tax problems they have created here. The notable increase in the OP's property value over the years has created an ongoing tax liabilty entirely due to placing it into the lifetime trust, for reasons that have not been explained in this post.

mjianoramn

Thank you all for your response. Really appreciate it. I need to absorb all the information you have shared. I think at the end of the day, I have to pay the IHT and any interest to HMRC, which means I will have to sell our home to pay this. I try not to get stress over this and no point of stressing as it will not make it go away or change the outcome. I need to search HMRC website on information on how much I need to pay and any forms I need to complete to pay the IHT + interest.

Thank you again all. This has been very helpful and useful.

GDB2222

https://forums.moneysavingexpert.com/discussion/comment/81954691#Comment_81954691

You may be overestimating the amount of tax, perhaps.

If the house was worth say £425k in 2022, then the tax due then would have been £6k. The exit charge would be based on current value, so 6% would be £12k. But my understanding is that you only pay 4/10ths of that, as it is 4 years since 2022, ie around £5k.

So, depending on valuation, you may be paying somewhere in the region of £10-15k in total.

There seem to be some experts around and maybe they can correct any mistakes in the above figures.

poseidon1

https://forums.moneysavingexpert.com/discussion/comment/81954771#Comment_81954771

I agree your 'back of envelope' assessment of the potential tax payable in 2022, and the impact such payment would have on any exit IHT charge on termination of the trust in 2026. The liabilty is no where near the 40% IHT charge people are more accustomed to. Certainly the tax should not be of a magnitude high enough to justify contemplating the sale of the property.

However, I do not reccomend OP DIY the preparation and submission of the IHT return IHT 100. This really is the job of a tax accountant.

As regards potential interest and penalties on the 2022 ten year event, reccomend solicitor pursue SWW to cough this up , bearing in mind they were professional trustees at all material times.

Hopefully SWW will have full professional indemnity cover in place for their negligence here, since heaven only knows how many of their other clients are ( unknowingly) in the same boat.

Seems to me an HMRC investigation into SWW created trusts is long overdue.

mjianoramn

Thank you so much @GDB2222 for the info. You are right. I am overestimating it. Will it only be who should be paying for it or is it all Trustees, which includes SWW?

mjianoramn

Thank you @poseidon1 . I have a meeting with my tax accountant to discuss this. I will contact my solicitor as well. Is it worth informing SWW that I am in contact with my solicitor about this?

poseidon1

https://forums.moneysavingexpert.com/discussion/comment/81954869#Comment_81954869

I would be inclined to let your solicitor approach them on a formal basis for compensation for the havoc they have caused.

If you warn them you are now looking into the IHT compliance that was never done, they may try and suggest you give them the opportunity to handle it , which would definitely be unwise.

In any event, SWW believe they are no longer trustee as a result of the deed they charged you for.

Your solicitor will need to consider whether that deed did in fact successfully terminate the trust, since in the summary you provided of the original trust terms the trust was originally expressed to be irrevocable, so your solicitor will need to examine the trustee powers recited by SWW to enable the termination.

You also indicate Land Registry has given a 28 April deadline to transfer the property back to you, so you do not want any prevarication by SWW which would prevent you calling a halt to the transfer process whilst your solicitor/accountant consider your options.

One thing I should mention which might point to keeping the trust until 2032.

If the trust is then terminated within 90 days after that 10th anniversary, the trust IHT rules do not impose an IHT exit charge - see article below explaining -

https://www.mandg.com/wealth/adviser-services/tech-matters/iht-and-estate-planning/trust-taxation/discretionary-trust-taxation#exit-charge-after-the-first-ten-years

It is one of the nuances of these trusts which is often overlooked ( and obviously overlooked in 2022) but well worth exploring with your advisers.

If however, you decide to keep the trust for the time being ( to avoid a 2026 exit charge) , you still need to remove SWW and will be looking for them to retire as trustees and be replaced by one or other of your children going forward. SWW should also pay for the legal cost of removing them as trustee.

Lots to discuss with your advisers, but you need to be quick.

FINALLY CAN I SUGGEST MODERATORS MOVE THIS THREAD TO THE DEATH , FUNERALS AND PROBATE FORUM, WHERE THESE TRUST QUESTIONS MORE COMMONLY ARISE.

mjianoramn

Thank you @poseidon1 . I agree. Lots to discuss with my tax advisers and solicitors. I paid the legal fees for this. Not sure if SWW did make a contribution towards the fee of removing them. I thought as it is my home, i had to pay the full legal fee. Not sure if I can cancel the process as it is only 3 weeks before the Land Registry completes the paperwork and transfer. The TR5 says this "The trustees of the MC Home Protection Trust have by deed of appointment transferred the property into my sole name. I am now the sole owner of the property, so the restriction is no longer required". Need to understand what "restriction is no longer required" means. Does this mean the property is still in the Trust or the Trust will be wound up due to SWW being removed as a Trustee. Thank you again. I have learned a lot from everyone's response. Really appreciate it.

GDB2222

https://forums.moneysavingexpert.com/discussion/comment/81954864#Comment_81954864

I expect that it will come down to you, as the trust deed probably includes an indemnity that you gave SWW.

I think you should take legal advice if you were misled, although the costs might make it uneconomic to sue unless there’s a group of you. You might want to have a look around to see whether anyone has formed an action group. Maybe on Facebook?