Discretionary trust?

Hi All,

I wonder if you would be able to give me some advice on the following please.

Father (F) wants to buy a property for his son, girlfriend and their unborn child to live in. F is worth in the region of £1.25 million and he would prefer to make a gift in some way so that the money is out of his estate.

He does not want to make an outright gift to his son, because he is worried the property would be at risk if they separate or marry and divorce.

He is looking to purchase for around £150,000. Ultimately F wants his son to have the property outright in the long term, so a life interest would not seem to make sense as the son cannot be the life tenant and the remainder beneficiary.

Perhaps a discretionary trust would be the best way to protect the property, but I would appreciate any comments on this?

Joe Pegler
Chattertons Solicitors

You will want to bear in mind that a trust of any kind that was clearly meant to benefit son (because it bought a house for him) at a time when he is with his partner and they have a child will only offer partial protection (if any) over an outright gift if they marry and subsequently divorce.

A divorce specialist or trust litigator with experience in this area will be able to tell you more.

In the circumstances, the type of trust is unlikely to be significant. If a life interest (or even a discretionary trust) then F’s grandchildren could be remaindermen and the property could be advanced to him subsequently under an express power of advancement (mentioning the life tenant) or overriding power of appointment.

Andrew Goodman
Osborne Clarke LLP

From a family law perspective the son should enter into a cohabitation agreement with his girlfriend to accept that the property is solely his (if it is to be owned by the son). Even putting the title to the property in the son’s sole name or into a trust of which he is the beneficiary would not be sufficient as it would still be vulnerable to a potential Trust of Land Act claim without a cohabitation agreement.

In the event they become engaged to marry the son should then enter into a pre nuptial agreement to deal with the property. On marriage it is difficult to entirely ring fence a family home from being claimed against by a spouse if it is owned by one party. Whether this is viable will depend upon what other assets/income/liabilities there are available, especially as there is a child involved. More information would need to be provided to be able to advise fully.

Jane Livingstone
Knights Plc

You could create a life interest trust with a power to advance capital to the son, with a discretionary trust ‘in remainder’. A suitably worded life interest trust will pay a lower rate of SDLT than a discretionary trust would.

If the son is a first time buyer than an even better option (from an SDLT perspective anyway) would be for the father to create a discretionary trust, which then lends the money to the son to buy the property. Trusts can’t get ‘first time buyer’ relief (at least that appears to be HMRC’s view).

Paul Davies
Clarke Willmott LLP.

For IHT purposes, there is no difference with a lifetime trust between a discretionary trust and an interest in possession (unless the criteria for a disabled persons trust apply).

The use of a discretionary trust might be the better option, although this might not protect the property from a claim by the child’s mother (or even the child) if the son and his girl-friend separate. The property could still be taken as a resource available to the son, especially bearing in mind that it will have been acquired to provide a home for the family unit.

Paul Saunders