In the complex world of estate planning, financial security, and family protection, specialized trusts play a pivotal role in safeguarding assets while addressing unique needs. Two such instruments that often come into play, particularly in the UK under HMRC guidelines and inheritance tax (IHT) rules, are the protected property trust and the disabled persons trust. These trusts are not interchangeable; each serves distinct purposes, offers specific tax advantages, and caters to different life scenarios. This comprehensive article delves deep into their definitions, mechanics, benefits, drawbacks, setup processes, tax implications, and real-world applications. Whether you’re a homeowner worried about care home fees, a parent planning for a child with disabilities, or a financial advisor seeking clarity, understanding these trusts can empower better decision-making.
What is a Protected Property Trust?
A protected property trust, sometimes referred to as a “property protection trust” or “asset protection trust” in broader contexts, is primarily designed to shield a family’s home from being sold to cover long-term care costs. It is a type of will trust that activates upon the death of the first spouse or partner in a couple. The core idea is to place the deceased’s share of the property into the trust, allowing the surviving partner to continue living in the home while ring-fencing that share from future assessments.
Key Features of a Protected Property Trust
- Activation Trigger: Typically created via mirror wills for couples. Upon the first death, the deceased’s interest in the property (usually 50% in joint tenancy scenarios) transfers into the trust.
- Right to Reside: The surviving spouse retains a lifelong “interest in possession” (IIP), meaning they can live in the property rent-free for life.
- Beneficiaries: Ultimate beneficiaries are often the children or specified heirs, who inherit the trust’s share after the survivor’s death.
- Severance of Tenancy: To make this work, the property ownership must be converted from joint tenants to tenants in common, ensuring each partner owns a distinct share.
This trust gained popularity in the UK following concerns over local authority care fee assessments, where a person’s home can be counted as an asset if its value exceeds certain thresholds (currently around £23,250 in England for deliberate deprivation rules).
How Does a Protected Property Trust Work in Practice?
Imagine a married couple, John and Jane, who own a £500,000 home as joint tenants. They set up protected property trusts in their wills. John dies first. His 50% share (£250,000) goes into the trust rather than directly to Jane. Jane continues living in the home. If Jane later needs residential care costing £1,000 per week, the local authority assesses her assets but can only consider her own 50% share plus other savings. The trust’s £250,000 is protected, as it’s no longer hers to deprive.
However, deliberate deprivation rules apply: If the trust was set up primarily to avoid care fees and the person enters care soon after, authorities might challenge it. Timing is crucial—ideally, establish the trust years in advance.
Benefits of a Protected Property Trust
- Care Fee Protection: The primary allure. In England, where care costs average £50,000–£100,000 annually, preserving half the home can save families hundreds of thousands.
- Continued Residence: No eviction risk for the survivor.
- Inheritance Preservation: Ensures children inherit the protected share intact.
- Flexibility: Trustees (often the survivor and children) can sell the property and buy a new one, with the trust share following.
- Sidestep Probate Delays: The trust share avoids probate on second death for that portion.
Drawbacks and Limitations
- Not Foolproof Against Deprivation Claims: Local authorities can investigate if the trust seems motivated by fee avoidance.
- Loss of Control: The survivor can’t downsize and keep all proceeds without trustee approval.
- Tax Implications: The trust is subject to IHT on the first death (if estate exceeds £325,000 nil-rate band, plus £175,000 residence nil-rate band for homes left to direct descendants). Anniversary and exit charges may apply under relevant property regime if not IIP-qualified.
- Costs: Solicitor fees for setup (£1,000–£3,000) and potential ongoing trustee expenses.
- Relationship Changes: Complications if the survivor remarries; the new spouse might claim against the estate.
What is a Disabled Persons Trust?
Shifting focus, a disabled persons trust (DPT), also known as a “disabled person’s interest trust” under Section 89 of the Inheritance Tax Act 1984, is tailored for beneficiaries with disabilities. It provides favorable IHT treatment while allowing assets to support the disabled person’s needs without disqualifying them from means-tested benefits.
Eligibility Criteria
To qualify as a DPT:
- The beneficiary must be “disabled” per HMRC definitions: Entitled to certain benefits like Personal Independence Payment (PIP), Attendance Allowance, or certified as unable to work due to illness.
- At least 50% of the trust fund applied during the beneficiary’s life must benefit them (though in practice, it’s often 100%).
- The trust must be established by will, lifetime settlement, or under intestacy rules.
There are two main types:
- Interest in Possession DPT: Beneficiary has a right to income (and sometimes capital).
- Discretionary DPT: Trustees have flexibility in distributions.
Mechanics of a Disabled Persons Trust
Funds in the trust can cover care, equipment, holidays, or therapies. Crucially, for means-tested benefits (e.g., Universal Credit, Housing Benefit), the capital is disregarded if the trust mandates it’s primarily for the disabled person.
Example: Parents leave £300,000 to a DPT for their adult son with severe autism. Trustees (siblings) use it for his supported living costs. The son claims benefits without the £300,000 counting against him. Upon his death, remainder goes to siblings.
Tax Advantages of Disabled Persons Trusts
DPTs enjoy privileged IHT status:
- Entry: Treated as if the disabled person owns the assets personally—eligible for full nil-rate band.
- During Lifetime: No 10-year anniversary charges; exits proportional charges only on excess over nil-rate band.
- Exit on Death: If the beneficiary dies, the trust value is added to their estate for IHT but at potentially lower rates if they’ve used their nil-rate band.
- Capital Gains Tax (CGT): Uplift on death for hold-over relief.
- Income Tax: Beneficiary taxed on income received.
Contrast with standard discretionary trusts: Full relevant property regime with up to 6% charges.
Benefits of a Disabled Persons Trust
- Benefits Preservation: Critical for state support; local authorities ignore the trust capital.
- Tax Efficiency: Significant IHT savings—potentially 40% on amounts over £325,000.
- Flexibility and Protection: Shields vulnerable beneficiaries from mismanaging funds or exploitation.
- Long-Term Planning: Supports lifelong needs without eroding family wealth.
- Family Harmony: Prevents resentment if one child needs more support.
Drawbacks and Considerations
- Strict Eligibility: Must prove disability; retrospective claims possible but complex.
- Trustee Responsibilities: Ongoing administration; professional trustees add costs (£500–£2,000/year).
- Limited Access: Capital locked unless for the beneficiary’s benefit.
- Changes in Law: Benefits rules evolve; e.g., 2016 care act integrations.
- Setup Complexity: Requires specialist advice; DIY risks invalidation.
Comparing Protected Property Trusts and Disabled Persons Trusts
| Aspect | Protected Property Trust | Disabled Persons Trust |
| Primary Purpose | Protect home from care fees | Support disabled beneficiary + tax perks |
| Asset Type | Mainly residential property | Cash, investments, property |
| Trigger | First death in couple | Will, lifetime gift, or intestacy |
| Tax Regime | IHT on entry; possible relevant property | Favorable IHT (personal nil-rate band) |
| Benefits Impact | None direct; focuses on care assessments | Disregarded for means-tested benefits |
| Beneficiary Rights | Survivor: lifetime residence; heirs: remainder | Disabled person: primary benefit; remainder to others |
| Common Users | Elderly couples | Parents/grandparents of disabled individuals |
While a protected property trust is home-centric and couple-focused, a disabled persons trust is beneficiary-centric and disability-focused. They can overlap—e.g., including a property in a DPT if the disabled person lives there—but rarely combined directly.
Setting Up These Trusts: Step-by-Step Guide
For Protected Property Trust:
- Consult Solicitor: Specialist in wills and trusts.
- Sever Tenancy: Form SEV to Land Registry.
- Draft Mirror Wills: Include trust clauses.
- Appoint Trustees: Survivor + independents.
- Sign and Store: With wills.
- Review Periodically: Every 5–10 years.
Costs: £1,500–£5,000 for couple.
For Disabled Persons Trust:
- Assess Eligibility: Gather medical/benefit evidence.
- Choose Type: IIP vs. discretionary.
- Draft Deed/Will Clause: HMRC-compliant language.
- Fund the Trust: Via will or lifetime transfer (PET for IHT).
- Notify HMRC: Form IHT409 for recognition.
- Appoint Trustees: Family + professional if needed.
Costs: £2,000–£10,000+ depending on complexity.
Both require ongoing compliance: Trust tax returns (SA900), registration with Trust Registration Service (TRS) if taxable.
Real-World Case Studies
Case 1: Protected Property Trust Success
The Smiths, in their 70s, set up a protected property trust in 2010. Mr. Smith died in 2018; his £200,000 share entered the trust. Mrs. Smith entered care in 2022 with £150,000 personal assets. Council funded care after her assets depleted to £23,250, ignoring the trust. Children inherited £200,000 intact in 2024.
Case 2: Disabled Persons Trust in Action
The Johnsons left £400,000 in a DPT for daughter Emily (Down syndrome). Trustees funded £30,000/year for care. Emily retained PIP and council housing support. On Emily’s death at 45, remainder (£250,000 after expenses) to siblings, saving ~£30,000 IHT.
Pitfall Example: A couple set up a protected property trust 6 months before one needed care. Council claimed deprivation, including the trust share in assessments. Lesson: Plan early.
Common Myths and Misconceptions
- Myth: Trusts Avoid All Care Fees – No; only protects the ring-fenced share, and deprivation rules apply.
- Myth: DPTs Are Only for Severe Disabilities – Broader: Includes mental health, chronic illnesses qualifying for benefits.
- Myth: Expensive and Only for the Wealthy – Viable from £100,000+ assets; costs proportionate.
Recent Developments (as of 2025)
UK government consultations on care funding (post-Dilnot review delays) haven’t scrapped property in assessments. Labour’s 2024 manifesto hinted at cap reforms, but no changes yet. For DPTs, PIP reforms emphasize functionality over diagnosis. TRS expansions require more trusts to register, increasing admin.
When to Seek Professional Advice
These aren’t DIY tools. Engage:
- Solicitors (STEP members).
- Financial advisors (for tax modeling).
- Accountants (for compliance).
Free initial consultations common; compare quotes.
Conclusion: Securing Legacy with Strategic Trusts
Protected property trusts and disabled persons trusts exemplify thoughtful estate planning— the former guarding the family home against unforeseen care burdens, the latter ensuring vulnerable loved ones thrive without fiscal penalties. While powerful, they’re not panaceas; success hinges on timely setup, compliant structuring, and realistic expectations.
In an aging population with rising care costs (£15bn+ annually in UK) and increasing disability support needs, these trusts offer peace of mind. Review your situation: Do you risk care fee erosion? Does a family member need protected support? Integrating them into broader plans—wills, LPAs, life insurance—maximizes protection.
Ultimately, consult experts to tailor these tools. With proper implementation, they preserve wealth across generations, embodying foresight over regret. For more on protected property trust setups or disabled persons trust eligibility, start with a specialist today.
