I’m looking for some guidance on so called Principal Private Residence Bare Trust or Capital Growth Bare Trust. You may know it by another name but it is the hybrid arrangement used for asset protection (during settlor’s life only) and tax efficiency (IHT and CGT).
It’s structured using a combination of discretionary trust features and bare trust elements to ensure-
PPR can still apply when settlor dies because due to reversion to bare trust two days or so before death (it’s all written into the deed).
No IHT entry, exit or periodic charges
I’d never heard of these before but I’m sure many of you have.
My specific question is does HMRC fully accept them. What about at death?
Any insights you can provide would be much appreciated.
I have never come across the product but the OP is wholly inadequate as a description of its structure. I find it hard to comprehend how some kind of magic event can effect a valid significant tax consequence on the death of an individual other than retrospectively and thus ineffectively. But then I am a world-weary grizzled cynical terminally sceptical old b*****d.
Does the “scheme” include a foolproof death prediction mechanism?
Is this a current idea? Neither “Principal Private Residence Bare Trust” or “Capital Growth Bare Trust” ring any bells for google. Or is it an old idea that might not feel as attractive as it used to with the pre-owned assets charge and the FA2006 IHT changes to trusts?
As you have described it, and as Jack alludes to, this would seem to be Schrödinger’s cat-type of trust in that you will only know what the trust is two days later. Nowadays, new “having your cake and eating it” type ideas tend to come with DOTAS, promoter, enabler, etc issues.
Can you provide a link or set out more details as to how it is intended to work?
When in practice I did have a few clients who were so adverse to paying tax that they were prepared to have a crack at any novel hare-brained avoidance scheme whatever the downside (of which I solemnly warned them in advance). Great fun was then had by all especially by my bank manager.
Normal clients, however, often had a mental block which is shared by my nearest and dearest whom I now struggle to advise without the consolation of my favourite bookkeeping entry, Debit Cash. A prophet is never honoured in his own land.
They fixate on what the (admittedly thoroughly undeserving Treasury) are getting: 45,40, 20, 28, 24 etc. %; rather than the reciprocal of what is left for them: 55, 60, 80, 72, 76 etc.%.
And all this before they factor in the cost and mental attrition of combat stress PTSD at the hands of His Majesty’s OGPU/Cheka/NKVD based at the Lubyanka on the Strand London WC2, that lacks only a statue outside of Feliks Dzerzhinsky, a former Chairman of the Board.
Below is the more detailed explanation of how it works. It sounds too good to be true doesn’t it? There is a guy on Tik Tok - the Asset Protection Guy. He talks about it in at least one of his posts. It’s commonly used by the companies specialising in home transfers to lifetime trusts (to avoid care fees).
As well as commenting further on the definition below can I also please ask you .. where do you sit on this issue? Are you for or against clients putting their residence into Trust when clearly a major motivation is care fee avoidance? My view is that whilst Trusts can be great way of estate planning the main residence should always stay with the owner occupier as it’s the safest option for them and allows them the most flexibility for moving and refinancing and is the best option for their peace of mind, knowing that they own their own home! What are your views on the matter?
Here’s the explanation of the trust:-
While there is no single “official” HMRC name for this type of trust, it is structured using a combination of discretionary/lifetime trust features and bare trust elements, engineered in such a way that:
Private Residence Relief (PRR) can still apply at the end.
No IHT entry, exit, or 10-year periodic charges arise due to the trust structure.
Capital gains tax is avoided upon disposal, due to reversion to bare trust shortly before death.
Let’s unpack how it works.
Trust Structure Breakdown
1.
Initial Setup: Lifetime Discretionary Trust (LDT) with Bear Trust Overlay
The settlor transfers a property (often their main residence) into a lifetime discretionary trust.
However, any capital growth on the property over and above the nil-rate band is held on a bare trust for the settlor.
This is done through a clause in the trust deed that splits beneficial ownership of growth (i.e. gains) and original value.
2.
Bare Trust Element
The bare trust element means that the settlor is treated as the beneficial owner of the capital growth for tax purposes.
For CGT: Since the property is the settlor’s principal private residence, Private Residence Relief (PRR) applies to any gain.
For IHT: Bare trusts are considered transparent for IHT, so there is no transfer of value, and therefore:
No entry charge at setup.
No 10-year periodic charges.
No exit charges.
3.
Reversion Clause Prior to Death
The trust includes a clause (very carefully drafted) that two days prior to the settlor’s death, the entire trust reverts to a full bare trust.
This ensures that:
The settlor is deemed the owner of the property for CGT purposes at time of death.
Private Residence Relief fully applies, so no CGT is due.
The asset is part of the settlor’s estate, and IHT is payable as normal—but without any trust-related IHT complications.
TikTok = A highly advanced platform where attention spans go to die, and teenagers become millionaires by pointing at invisible words to music you’ve never heard of. Often mistaken for a clock by people over 50, it’s actually a never-ending talent show judged by algorithms and people named “@xX_SlayerBae420_Xx."
My starting point for all this sort of stuff is to be very suspicious. I have been involved in looking at lots of things over the last few years that turn out to be scams or where the people promoting it change from slagging off independent professional advisers (because they, as “experts”, know better) to being arrested. I am not saying that this idea falls into any of those categorise. I have no idea how to use TikTok (sorry Jack) and so haven’t looked at the videos.
I also know little about care home fees (sorry Jack) and so I don’t have a professional view on them. My personal view is that people who worry about care home fees and pay tens of thousands of pounds to put their own home in to a trust should not do the trust bit. As well as paying a lot of money now, having to then worry about care home fees / anti-avoidance / moving / equity release / annual fees / loss of control, etc it makes them a hostage to fortune if a government needing to raise some cash and decides that people with trust funds are fair game.
Let’s assume that the promoter thinks that there is some favourable tax treatment going on (e.g. no entry charge when the interest in the valuable property is given to the discretionary trust, because they have done something clever) then the unusual “clause (very carefully drafted) that two days prior to the settlor’s death, the entire trust reverts to a full bare trust” makes it seems very, very likely DOTAS applies.
Just to be clear, I don’t think that having an asset jointly owned by the trust (current value) and individual (growth in value) is, by itself, DOTAS-able. But I do think that purporting to retrospectively change the nature of the trust is contrived.
While it is strategically sound to transfer your own property elsewhere at a time when your state of health is not such as to be at credible risk of care fees, so that a local authority will have an uphill future task in arguing “deprivation” successfully, it is most crass to leave lying around cogent contemporaneous evidence of your motivation in the shape of your responding to marketing material claiming that it achieves that very objective. Billy Bunter often strenously denied eating a fellow’s pupil’s cake sent from home while his face was covered in the remains thereof.
At peril of dignifying the scheme with a technical analysis:
1 It is A CLT and a GROB
2 s226A disapplies PPRR on a later disposal of the house by the trustees and there will be no CGT-free uplift on death unless the trust despite being a RPT for IHT gives someone an interest in possession s73 will not operate on a death
3 It is not easy to separate out the future growth in value of an asset.
“This is done through a clause in the trust deed that splits beneficial ownership of growth (i.e. gains) and original value.” Yeah, right !!! It would need to stand a challenge from the law and also the GAAR.
As an arch-exponent of the pre-2013 remittance rules the best one could achieve was to put the sale proceeds of an asset sold at a gain into a separate bank account to avoid mixing so that one could remit funds out of it, if at all, at least knowing the worst downside: HMRC would treat the gain as remitted first. It was impossible to put a part of the sale proceeds representing gain alone into a separate account and not remit it at all. Whereas one could put income from an asset into a separate account because it is juridically separate from the underlying asset.
As a maestro of alphabet share arrangements one can only stream ownership of the future growth in value of a company separately by creating a separate class of share with appropriate rights: that is, an entirely discrete separate asset.
You can fragment the the property rights, e.g. into a leasehold interest and a freehold reversion subject to s102A FA 1986 but it is hard to do that and ensure that one asset will always be equal to current freehold value. The only other way to do this with a property is to give someone other than the owner an option to acquire it at its current value and the legislature is across this in the shape of ss17 and 18 TCGA and s163 IHTA. It can work for options between spouses.
So I ask the question that might have been put to Abraham Lincoln after his assassination at the theatre: “apart from that Mr President, how did you enjoy the play?”
And how could I forget “The trust includes a clause (very carefully drafted) that two days prior to the settlor’s death, the entire trust reverts to a full bare trust”. As no none can forecast the date of a person’s death (save by suicide) not even Tommy Cooper could make his magic trick work. There is absolutely no way known to the law whereby a trust can change its tax status retrospectively once death has occurred though it can do so once it has.
This is so obtuse that it is close to if not actual fraud. I would report it to HMRC so they can publish a Spotlight about it. In fact I will.
TikTok = A highly advanced platform where attention spans go to die, and teenagers become millionaires by pointing at invisible words to music you’ve never heard of. Often mistaken for a clock by people over 50, it’s actually a never-ending talent show judged by algorithms and people named “@xX_SlayerBae420_Xx."
My starting point for all this sort of stuff is to be very suspicious. I have been involved in looking at lots of things over the last few years that turn out to be scams or where the people promoting it change from slagging off independent professional advisers (because they, as “experts”, know better) to being arrested. I am not saying that this idea falls into any of those categorise. I have no idea how to use TikTok (sorry Jack) and so haven’t looked at the videos.
I also know little about care home fees (sorry Jack) and so I don’t have a professional view on them. My personal view is that people who worry about care home fees and pay tens of thousands of pounds to put their own home in to a trust should not do the trust bit. As well as paying a lot of money now, having to then worry about care home fees / anti-avoidance / moving / equity release / annual fees / loss of control, etc it makes them a hostage to fortune if a government needing to raise some cash and decides that people with trust funds are fair game.
Let’s assume that the promoter thinks that there is some favourable tax treatment going on (e.g. no entry charge when the interest in the valuable property is given to the discretionary trust, because they have done something clever) then the unusual “clause (very carefully drafted) that two days prior to the settlor’s death, the entire trust reverts to a full bare trust” makes it seems very, very likely DOTAS applies.
Just to be clear, I don’t think that having an asset jointly owned by the trust (current value) and individual (growth in value) is, by itself, DOTAS-able. But I do think that purporting to retrospectively change the nature of the trust is contrived.
I should also say that I thoroughly endorse Tigger’s instincts about care home worries and Tik Tok (Sorry, Mr Xi Jinping) and feel certain that the reversion nonsense is a DOTAS hallmark. There is bound to be a premium fee and possibly a promoter’s confidentiality obligation. There is almost certainly going to be a Condition 1 situation for an IHT hallmark and definitely a Condition 2 in the shape of the ludicrous reversion.
Condition 1
The main purpose, or one of the main purposes, of the arrangements is to secure one or more of the IHT advantages listed below, namely:
a) The avoidance or reduction of a relevant property trust entry charge
b) The avoidance or reduction of relevant property trust ten-year anniversary and exit charges, charges on property leaving employee or newspaper trusts or charges in connection with close company transfers
c) The avoidance or reduction of an IHT charge that arises from an application of the gifts with reservation of benefit rules, in circumstances where there is also no pre-owned assets charge to income tax
d) A reduction in the value of a person’s estate without giving rise to a chargeable transfer or a potentially exempt transfer.
Condition 2
The arrangements involve one or more contrived or abnormal steps without which the tax advantage could not be obtained.
This is so obtuse that it is close to if not actual fraud. I would report it to HMRC so they can publish a Spotlight about it. In fact I will.
You are going to make someone at HMRC look through hours of boring tiktok videos just so they can find the right one. That’s nasty! OP, show some kindness to HMRC and create a link to the right video so that Jack can put a stamp on it and post it to HMRC.
I agree with Tigger. I have reported it but as my brain is programmed to avoid social media I was indeed unable to citethe actual video. I have also told Tax Policy Associates
There is no IHT benefit, so the council would find it very easy to prove deprivation of assets, and use their clawback powers in response, particularly as the scheme provider will have advertised avoiding nursing home fees as the benefit of the scheme.
I believe that this is commonly used for these “lifetime trust companies”. They promise their clients no CGT charges, no IHT periodic charges and no loss of RNRB on the transfer of your home to a Trust. Just pure asset protection (albeit only of a value of the NRB). Not much of a saving for a house worth say £1.5million!
I’d like to ask this guy if he’s transferred his home to a Trust!
Had a look on his website - which interestingly states that he works in ‘association’ with another company of whom 4 of the 5 directors are fully STEP qualified. Not sure STEP would relish the idea of being associated with this!
I think that it is so absurd that anyone promoting it is more likely to b accepted as being of unsound mind than convicted of fraud. However, this correspondence has at least given much amusement.
Trust Structure Breakdown
|