Hello, my name is Jade Smith and I am Business Relationship Manager at Equilaw. Today, I am joined by Malcolm Emery of Legal Studio Solicitors. Malcolm is a solicitor and chartered tax advisor who specialises in tax, trust and probate matters.

In today’s podcast Malcolm is going to provide some practical guidance on cases where the property is held in trust

Q- So, Malcom we often come across situations where an equity release cannot proceed because the property is held in trust. Can you explain what needs to happen so that the equity release can proceed?

A – Finding out that a property is held in trust can come as a bit of a shock to the client. It may be that they put the property into trust a while ago and just forgot about it. A more usual situation is where a married couple or civil partnership have put identical Wills in place which provide that on the first spouse’s death their interest in the property is held subject to a trust. The terms of the trust will provide that the surviving spouse has a right to occupy the trustees’ interest in the property for life following which the trust will end and the trustees’ interest in the property will pass to someone else (usually the children). For the equity release to proceed it is necessary to bring the trust to an end.

Q – Okay, so the trust needs to come to an end. Is there anything that the client can do before the equity release process starts?

A – Undertaking a review of the paperwork would be time well spent to see if there is any evidence that the property is held in trust or possibly owned by the children. It may be that the client met with a Will writer or solicitor in the past about IHT or care fees planning and there are letters of advice available which clearly explain how the property is currently owned.

Q – Thank you Malcolm, can you please explain why the trust may have been created in the first place?

A – Trusts are very popular as they offer protection against a family’s changing circumstances and help preserve family wealth. A married couple or civil partnership may be concerned that the surviving spouse could remarry or require residential care in the future. Both these risks could mean that the family home may have to be sold to pay off the new spouse if the marriage does not work or pay for any ongoing care required by the surviving spouse. If a trust owns the family home the risk of it being used for one of these purposes is reduced.

Q – I see, so are there potential downsides in bringing a trust to an end?

A – Absolutely. Careful consideration must be given before a trust is terminated because the protection offered by the trust will be lost. The disadvantages of breaking the trust should be weighed up against the benefits offered from releasing equity from the property

Q – Thank you Malcom, could you please explain how a trust is ended? This is a very common question we are asked here at Equilaw.

A – This depends on the terms of the trust. The trust may give the trustees powers which allow them to bring it to an end. Providing the equity release applicant is a beneficiary of the trust the trustees can transfer their interest in the property to them providing they consider this is appropriate. In reaching a decision the trustees should consider the reasons why the trust was put in place in the first place and whether any other beneficiary named in the trust will be disadvantaged by transferring their interest in the property to the applicant.

If the trustees do not have any powers to bring the trust to an end, then the beneficiaries may be able to agree between themselves to do this. This is a very technical area and specialist trust advice should be obtained as the position will depend on the wording contained in the trust deed or the Will.

Q – Great, so let’s assume the trust can be ended could you please explain how this is done?

A – A legal document known as a deed of appointment, or a deed of partition would be signed to confirm that the trust has ended. This would be signed by the trustees and the beneficiaries.

Q – Are there any problems if the Trustees and Beneficiaries do not live near each other? As I can imagine that would be very common.

A – This is not a problem as the documentation can be prepared in counterpart which means that each party to the document can sign a separate copy. All the copies together constitute the original deed.

Q – Thank you. Malcolm, you mentioned earlier that certain benefits will be lost if the trust is ended but is there any other issues that need to be considered?

A- The termination of a trust will have tax consequences. When the trust is ended, the trustees are deemed to dispose of their interest in the property for full market value even though they are gifting it to the beneficiary. If the value of the property has increased since it was put into the trust the difference between the two valuations is the capital gain.

However, as the applicant will have occupied the trustees’ interest in the property as their home, under the terms of the trust the capital gains will be covered by a relief known as principal private residence relief which means the capital gain is exempt from tax. This relief is not given automatically and must be claimed by the trustees.

Usually, there will be no inheritance tax implications of the trust being collapsed but it is very important that this tax is also considered before the trust is ended.

Q – Wow, the tax consequences of ending a trust sound quite onerous. Do the tax authorities need to be contacted?

A – Yes, under current tax rules most types of trusts must be registered with HM Revenue & Customs using their online trust registration service. If the trust has not already been registered this is something that the trustees will need to do.

Once the trust has been registered the trustees will need to file a tax return which provides details of the disposal of the trustees’ interest in the property. The trustees will also need to include a claim for principal private residence relief on the tax return so that the gain is exempt from tax. There is a time limit attaching to this claim, so it is very important that it is made at the earliest opportunity.

Although the trust must be collapsed so that the equity release can proceed the tax reporting requirements can be completed afterwards.

Q – So let’s say the documents to collapse the trust have been signed, what happens next?

A – The original documentation has to be returned to the solicitor who prepared it who will then make sure that it has been executed correctly. The solicitor will then provide Equilaw with a certified copy of the documentation so that they can then progress the equity release.

Q – A common question we are asked here at Equilaw is how long does it take to collapse a trust?

A – This will depend on the workload of the solicitor involved but it should be possible to complete the work within two weeks.

Q – Understood thank you. Last question for you Malcolm, once the equity release has been completed is it possible to put the property back into trust? Again this is a very common question we are asked.

A – The terms of the mortgage will prohibit the transfer of the property to a third party and so it will not be possible to transfer it into a new trust afterwards and therefore it is very important to consider the disadvantages of breaking the original trust before proceeding with the equity release.

Thank you Malcolm, this information is so helpful for advisers writing lifetime mortgage business. Properties held in trust is very common and can certainly cause delays, whilst raising many questions from advisers and also clients.

Thank you for everyone listening, we have more specialist podcasts in our series with Malcolm all available to download and listen to today.