Discretionary or Life Interest trust, cash or property?

[Corvid]

My father died in December 2016 and his will put all of his estate into a discretionary trust, comprising a half share in my parents' flat (the share being £82,500 in value) and around £110,000 savings. My mother, my brother and I are trustees and we intend, on the advice of the solicitor who handled probate etcetera, to convert the trust to a life interest trust with my mother having interest in possession. The solicitor suggests that this form of trust is more robust with regard to care fee planning.

Early discussion with the solicitor led me to understand that we could mix and match the contents of the trust so that it could hold either the entire property, none of it or anywhere between those two extremes. The value equivalent to my father's estate would be maintained by transferring cash to my mother or from her to the trust, depending on how we choose.

My understanding from reading through several posts on this site is that whatever assets make up the trust, the only capital gain to be considered would be that arising between my mother's eventual death and the winding up of the trust, so little or no tax.

So, my questions are:

1. Could anyone please confirm whether either form of trust is more robust than the other with regard to care fee planning, given current legislation?

2. Does the eventual make-up of assets in trust (as per "mix and match" above) make any difference? For example - from the HMRC website - the trust would be responsible for paying ground rent and management fees for a property in trust, whereas the solicitor tells me that in the case of the several properties held in trusts that her firm administers, the life tenant continues to pay all such costs. Are there any other considerations?

3. My mother has sufficient income and savings of her own. Would the trustees be obliged to transfer any income (interest on investments particularly) to her if she didn't want it?

Thank you.

[maths]

Much it seems to me is written in the press etc about ways to mitigate care home costs. Many suggestions are ineffective and may well create more problems than they solve.

It is important for those who may find themselves in a care home in the future to appreciate that by transferring some of their assets to third parties so that the local authority are then required to pay for the care home costs may mean that the quality of the care home and care is less than it otherwise would be. In addition, there may also in practice be no possibility of selecting which care home one wishes to reside in.

The transfer of assets to others also means that the transferor no longer has any right to re-access such assets.

In the present situation it seems that IHT is not necessarily a major issue (father's estate worth circa £200k) depending upon mother's own estate. On this basis giving mother a qualifying interest in possession in the trust assets (both the property and cash) will not give rise to adverse IHT consequences. As a consequence, in ascertaining mother's capital for care home cost purposes, her interest in possession is ignored.

However, with respect to the share in the home currently owned by mother, removing this from her capital resources is by no mens straightforward due to so-called deprivation of capital rules. Thus, she cannot transfer her interest into a life interest trust/to the children etc. with safety unless possibly she happens to be relatively young and very healthy with little possibility of entering a care home in the forseeable future.

If mother has an interest in possession in all of the trust funds then she will be automatically subject to income tax on any income arising on the cash deposits as it is hers (not the trustees").

On mother's death if the trust then ends with the children taking trust assets absolutely no CGT charge arises at that time.

If IHT is an issue then consideration to the nil rate band and residence nil rate band needs to be given.

[AGoodman]

Just on the mix and match point, the original trust assets are the assets within your father's estate so any transfers would have to take place at market value. Any "swaps" would effectively be sales between your mother and the trust.

This could be an issue if any assets are standing at a gain and SDLT could be an issue if your mother is not given a life interest prior to the trust acquiring her share of the property (because failing that the trust would have to pay the 3% rate).

[Corvid]

Thank you maths and AGoodman for your replies, in the light of which a far simpler alternative occurs to me and although I believe I know the answer, I would appreciate a quick confirmation if you are able. My alternative is:

The trustees wind up the existing discretionary trust and transfer all to my mother, who would still have total assets below the combined £650k nil-rate allowance. She gifts the equivalent value of what was my father's estate (around £200k) to the four people he hoped would eventually benefit from the trust. She still then has sufficient income, savings and (on sale) the property to fund at least seven years of care, should it come to that. Her income currently exceeds her cost of living so this situation is unlikely to change.

My assumption is that on death, whether within seven years of the gifts or later, there would be no liability to inheritance tax. Also, after seven years the local authority would have no claim on the gifted funds. Am I correct?

By the way, the intention would be that the gifted funds would be held by the recipients for the benefit of my mother - one-off private medical fees or whatever else might be necessary, once her own assets are consumed by care fees. This could include maintaining a choice and level of care and would be in line with my father's wishes as per some document or other that accompanied his will. "Trust" in individuals might be no more robust than "a trust" but at least it would be simpler.

[Corvid]

I have realised, upon further reading, that any idea of a seven year rule with regard to care fees is a myth, so my response to your replies is invalid. No matter and no need for either of you to respond unless my understanding of inheritance tax is very awry; I think we have picked out a path forward which will hopefully satisfy the wishes attached to my father's will and at the same time give the four beneficiaries (children and grandchildren) total control over the use of my father's estate.

Again, thank you both for your input.

[AnthonyR]

A little late to the party here, but based on the above info, the best route (which you may already have arrived at) would probably be to provide mother with the IIP in the property to allow her to remain, but the £200,000 intended to go elsewhere is left in discretionary trust for the benefit of the beneficiaries or distributed directly to them.

The danger of it passing to your mother and then her passing it down is that her gift could potentially be attacked as a deprivation of assets in due course, if it comes from your father there is no argument that your mother sought to avoid care fees.

The other thought process is whether the intended beneficiaries have their own IHT issues. If passing the funds to them impacts on their tax position then it may be more tax efficient to leave it in the trust (and perhaps loan it to them). Alternatively if it is being used to generate income to benefit children then again it may be better to generate the income in the trust and then use that income against their personal allowances for tax purposes.

Leaving the trust active will need a cost/benefit analysis against the costs of keeping it running though.