Deed of Covenant to Transfer House into Trust When Care Required?

We have many clients who are concerned about possible future nursing home fees and transferring their homes into trust during their lifetime is a popular option to mitigate against this expense.

As this is a relatively modest area of the country in terms of property values and wealth the vast majority of our clients doing this tend to have properties worth in the region of £100-200k and other assets of around £50k. So IHT is never going to be an issue

Our charges for the trust work are around £3k + VAT and not everyone is keen to pay that amount. For these clients we offer the Asset Protection Wills option with half of the property passing into trust on the death of the first spouse with the survivor being given an IIP over that half share.

We had thought about a 3rd option for those unwilling to spend a lot on fees now but are unsure if this would work. The scheme would involve a client signing a deed of covenant now promising to transfer the property (or their share of it) into trust at any point in the future should they be unable to carry on living there unsupported.

This is just an idea at present and we can see many possible problems with it working as intended but on the specific issue of care fees what do members think about whether or not this is deliberate deprivation of capital?

Either because there is a specific reference in the documentation to going into care etc or whether because the “disposal” happens just prior to admission to care (or is that wrong? Would the “disposal” have effectively happened when they signed the deed of covenant years earlier when fit and well?)

Tom Rodgers
Sutton Mcgrath Hartley

I think that would definitely be seen as a deliberate deprivation of capital.

Suzanne Stevens
Marshall Hatchick_

In the words of Sgt Fraser, “We’re doomed”.

This looks like flagrantly deliberate deprivation and would undoubtedly be caught by the anti avoidance legislation, particularly if the actual transfer were made immediately prior to going into care.

In any event, questions arise such as:

In whose favour is the covenant made?
What if capacity is lost prior to entry into care? The LPA attorney could not make the transfer under his/her powers – it would be a breach of duty.
Who sets up the trust?
Who are the trustees?

Etc, etc.

I personally would not go anywhere near an arrangement like this. Sorry to pour cold water.

Jill MacMahon
Thackray Williams LLP

I would think very hard about whether to continue offering the service of transferring the home into trust during lifetime. Is is almost certainly deprivation of capital. James Kessler has some helpful notes on the point in Drafting Trusts & Will Trusts. Its a dangerous area and I feat that sooner or later a someone will be giving evidence in Court on such an arrangement as the local authorities are increasingly aware.

On the Will trust. That’s probably ok. Williams on Wills has a good precedent which includes a nil rate band discretionary trust on the first death (C3.5). That may protect more than just a one half share of the house. Its a good idea to sever no only the joint tenancy in the matrimonial home but also sever any joint bank accounts if there is money or investments that may benefit from protection.

Vincent Oakley

This sounds like a duck, walks like a duck and looks like deliberate deprivation.

Iain Cameron
Star Legal

1 Like

I totally agree. This has deliberate deprivation written all over it.

Out of interest, have you had one of your lifetime transfer arrangements challenged, and if so, how have you defended it?

I know these are marketed widely, but I just cannot see how they are not also caught by the DD rules.
If it’s marketed as care home planning, or the client comes to you with the worries about care fees, and IHT is absolutely not an issue, and given the value of their assets, there is a very real danger that it could all go on care costs what other reason would there be to do this? I’d love to be proved wrong.

Fiona Dodd
Mayo Wynne Baxter

Bargepole…wouldn’t touch it with a!

The client may also find it difficult to equity release if that were something they wanted to do in the future.

Sarah Nadin
Banner Jones Solicitors

I now have concerns about putting a house into a discretionary will trust as it might not qualify for the new RNRB as directly inherited by a lineal descendant? However, the original post implies the property/estate is unlikely to be taxable, so that may not matter?

Iain Cameron
Star Legal