Property Protection Trusts (PPT)

Property Protection Trusts (PPTs) are commonly included in wills. They give a life tenant the right to live in the property for their lifetime, ensuring that at least half of the property is preserved for the deceased’s children if the survivor requires long-term care or remarries. These types of trusts are typically used for married couples or civil partners to ensure that the share of the home will ultimately pass to the children at the end of the trust period while still protecting the surviving spouse's interests.

A married couple currently owning a home as joint tenants can work with Fern Wills & LPAs to reconfigure the ownership (Severance of Tenancy). They can then update their Wills to ensure that if one of them passes away, half of the property will be held in trust for the benefit of their child while allowing the survivor to live in their share for life or a specified period.

Joint Tenants or Tenants in Common?

Considering the point above regarding severance, when considering a PPT, it is important to distinguish the difference between tenants in common (TiC) and joint tenants (JT). The property must be held as tenants in common to enter the trust.

What does this mean? To simplify, (TiC =50% each) and (JT = 100% each) refer to how a property is held or owned, and this ‘ownership’ is registered with the Land Registry. Traditionally, when houses were purchased, the owners would have been registered as joint tenants. This would have meant that if one tenant died, the other tenant would have inherited the property by survivorship because they already owned it 100%.

Holding the property as tenants in common means each owner holds a share of the home, which can be gifted via their will. This is usually 50/50 but can be a pre-agreed split. We would always advise that the title is checked, as there are occasions when clients may believe the house is held as tenants in common when, upon checking to verify this, the home is held as joint tenants.

When is it set up?

The trust would be set up on the death of the first testator. The legal title will then be transferred into the joint names of the surviving spouse (as an example) and the trustees.

It is essential to add that a property cannot enter a life interest trust on death, as until the mortgage has been settled, they are not seen to own the property. The simpler solution would be to ensure that both clients have life cover to cover the mortgage on the first death. If, on death, there is still a mortgage on the property and there is nothing in place, the survivor still has limited options:

They can sell and downsize as the PPT has downsizing provisions or
A cash loan could be taken out to settle the mortgage.

What is the point of a PPT?

The main reason for a PPT is to protect the home for the beneficiaries whilst ensuring a home for the spouse/partner.

If the house share is gifted to the partner directly, this could cause several issues – the main one being sideways disinheritance, i.e. the surviving partner remarries, and the house passes to their new spouse under the Will. A PPT will enable the partner to stay in the home and will avoid the risk of the partner potentially disinheriting the children.

Likewise, if a share of the home is gifted to the children directly while the spouse or partner has the other share, this could cause issues in that the children may want to force step-mum out of the property or insist that she pays rent to remain in the property. A PPT prevents this from occurring and essentially protects both parties’ interests. It is important to add that the beneficiaries will only own a share of the home when the PPT ends, either due to the death of the life tenant or earlier.

Can the property be sold?

A PPT can include powers allowing the life tenant to downsize and use the sale proceeds to purchase a substitute property for the life tenant to live in. The additional proceeds from the sale will remain in the trust, and the life tenant can be paid an income from this. This can be useful where the life tenant may be unable to look after a large home as they grow older.

Can the life tenant end the trust sooner?

If the life tenant (Mr) decides to revoke his life interest, he would inform the trustees that he wants the life interest to end, and the share of the home will be distributed to the beneficiaries. However, if the life tenant also owns a share of the property, there is a risk that the children, now owning a share of the property, could attempt to force a sale of the property.

Suppose the life tenant decides to revoke their life interest, as it will be earlier than death. In that case, the distribution to the beneficiaries will be classed as a Potentially Exempt Transfer (PET) from his estate. Therefore, he will need to survive the seven years for it not to form part of his estate for IHT purposes.

Disadvantages of a PPT

The main disadvantage of a PPT is that it inherently comes with a loss of control over the property for the survivor since they’d be limited in managing it. For example, they would need the trustee's agreement to sell, and they would be unable to take out equity release if needed.

Probate would be required, and fees would be associated with setting up the trust and transferring the property to the trust. Probate is unlikely to be entirely avoided unless all the assets are held jointly.

This creates future IHT liability since assets in the PPT would be treated as part of the life tenant’s estate for IHT purposes. If they had directly inherited the property, at least they could have had the opportunity to carry out lifetime planning to reduce this.

How is a PPT taxed?

Inheritance Tax

For inheritance tax (IHT) purposes, the life tenant of the trust is treated as inheriting the trust property on the testator's death. If the life tenant is the deceased’s surviving spouse or civil partner, the spousal exemption will apply and delay any IHT until the life tenant’s death.

When the life tenant dies, everything in the PPT will be revalued and included in their estate for IHT purposes. Where PPTs are used between married couples or civil partners, the RNRB will apply if the share of the home passes directly to their direct descendants, i.e. children.

It would be easier to explain where unmarried couples are using the example below: Fred and Elsie own a property as tenants in common. They are not married. Fred has two children from an earlier marriage. If Fred includes a PPT in his will, giving Elsie a life interest in the property until her death and names his children as the beneficiaries at the end of the trust, the RNRB will not apply. This is because the interest is seen as passing to Elsie and would, therefore, need to pass to her direct descendants for the RNRB to apply. If, however, Fred and Elsie get married, the RNRB will apply as stepchildren are classed as direct descendants.

Capital Gains Tax

No capital gains tax (CGT) is payable upon the testator’s death. The trustees will acquire the testator’s share of the property at the property's value at the time of death. There will be no CGT payable on the life tenant’s death. CGT must be considered if the property is sold between the testator’s death and the life tenant’s death. If a PPT covers the primary residence, this will allow the private residence relief for CGT to apply and ensure that no CGT will be payable if the property is sold, e.g. to downsize.

Income Tax

Where the property is the life tenant’s main residence, the trust will not generate income. However, if the property is rented, cash is released due to downsizing, or the property is not the life tenant’s main residence, the trust will generate income that will need to be taxed.

The life tenant is entitled to all income of the trust and is generally taxed on the basis that it belongs to the life tenant. However, this will depend on whether the trustees receive the income and then pay it to the life tenant or whether the trustees mandate the income so that the life tenant receives it directly. If the trustees mandate the income, it will be the responsibility of the life tenant to declare and pay the income tax due.

10 PPT Scenarios

1) The survivor wants to know the basics of the process to follow.

Citizens Advice and GOV.UK offer advice

Upon the first death, 50% of the property goes to trustees for the beneficiaries. The life tenant has the right to reside in the property for life. After probate is granted, the deceased's share of the property is handled in the following order:

Trustees must meet to accept their roles and confirm their willingness to hold the property in trust.
Minutes will be prepared for the trustees to sign.
A Declaration of Trust will be created between the surviving spouse and the trustees.
The property must then be transferred to the trustees' names with the Land Registry, and a restriction will be placed on the Land Registry Title referring to the Declaration of Trust.

2) Siblings own the property as TiC and have their own children.

As a co-owner of the home, the surviving sibling has the right to live there. Creating a life estate with a PPT trust would be advisable to secure their uninterrupted occupancy. This would prevent the children from forcing a sale of the property.

3) The surviving spouse with young children wants to move closer to preferred schools.

The PPT would outline downsizing provisions, allowing the life tenant to move. The new home would be held on the same terms as the trust, and the trustees would need to approve the purchase of an alternative home.

If the surviving spouse wants to move, the trustees can sell the property and use their share of the proceeds to buy a new property for the surviving spouse. The trust's share not used for the new purchase will remain in the trust. For example, if the trust and the survivor jointly own a £200,000 property 50:50 and the survivor wishes to downsize to a £100,000 property, the trust would own 50% of the new property (and invest £50,000 for income), and the survivor will own 50% of the property (and receive £50,000 in cash)

Where property is held 50:50, it will always remain as that, in shares, so the share held by the trust passes to the children along with any surplus cash invested from the downsize. The life tenants' share of the property, which they hold in their name, along with any money made from the downsize (their 50% of the excess sale proceeds), upon their death, forms part of their estate and passes either by the terms of their own Will or via intestacy.

4) Clients want to protect the property from sideways inheritance but don't want the young children to directly inherit the home as it may be too much for them at a young age. Also, the surviving partner may need financial assistance in the early years.

In short, a Protective Property Trust (PPT) is only a life interest over the property.

A Flexible Life Interest Trust (FLIT) gives the life tenant a life interest over the residue (everything left) and allows them to benefit from the capital at the trustee's discretion. The FLIT also allows other beneficiaries to benefit from the capital during the life tenant’s lifetime. On their death, the trust carries on as a discretionary trust to continue to protect assets after the second death. Both trusts provide some protection from care fees and also sideways disinheritance.

5) Amanda is the sole trustee (other than her father) of a PPT and Attorney of the Lasting Power Of Attorney (LPA) for her Widower father. The father has chosen a high-quality care home for himself whilst he has mental capacity. He is happy there and wants to stay. Amanda does not need the inheritance and is considering selling the property to fund the choice of care home.

The property can be sold by both trustees as long as both trustees have mental capacity. If the father steps down or loses capacity, then either a substitute trustee is appointed, if specified in the Will trust, or a second trustee can be appointed just for the sale. This can be arranged by a conveyancer.

6) A couple wants a PPT and children to benefit from the Residential Nil Rate Band (RNRB).

If the property goes to the residue and is a discretionary trust, it offers the most flexibility but no protection from IHT and the use of the RNRB. If, instead, it goes directly to direct descendants (including stepchildren), the house would qualify for the RNRB, and the remaining assets can go to the discretionary trust.

7) Mrs owns the property 100% but wants Mr to be a life tenant.

That fine, 100% of the property goes into the trust rather than 50%.

8) Mr and Mrs want to appoint each other and their children as trustees of the PPT.

It is common for a trustee to be a trust beneficiary, although care should be taken to avoid conflict of interest. It is best to appoint an uninterested party as a trustee as well.

9) Mr. and Mrs. are in their mid-fifties and have a PPT to benefit their children. They want to be able to move home or downsize before one of them dies. They may also want to revoke it by renewing their wills while both are alive and have capacity.

If the clause has been drafted this way, PPTs only take effect on the first death. Therefore, they can move home or downsize if both are alive. The PPT clause in the current Will may set out the current address or “any other main residence,” which essentially means the primary residence at the date of death. However, they must update their Wills if this wording isn’t present. If they no longer want a PPT, they can renew the Wills to remove this clause before the first death.

10) Mr A. is hesitant to use a PPT in case he has further disputes with his stepchildren, who are to be the co-trustees and the beneficiaries. He is concerned that his stepchildren will force or prevent the sale of the property.

Trustees can not force or prevent property sale in reasonable circumstances. A paramount clause reiterates that trustees must consider the needs of the Life tenant ahead of the needs of the beneficiaries.

The article was written with acknowledgement to Manisha Chauhan and contributing members and clients of the SWW.