My brother has terminal cancer and doesn’t have long to live. 

His adult son lives with him but has various issues which mean he doesn’t adult particularly well.

My brother wants his house to be sold and a flat purchased through a trust which means his son cannot sell the flat and use the money for anything other than keeping a roof over his head.

My brother’s solicitor has advised him to transfer his house to me. 

I will then sell it when the time comes, then will follow my brother’s wishes and purchase a flat via a trust.

I think I’m going to be hit by capital gains tax, am I right? His solicitor says I won’t but I think he’s wrong. Any help would be much appreciated.

Heather Rogers replies: I am sorry to hear your brother is terminally ill.

It is a very difficult time for you all as a family, and I can completely understand why your brother wishes to protect his son and to make sure that he always has a roof over his head.

However, the method that you have described to me to achieve this has significant pitfalls. I will outline these at the end.

The most straightforward way of achieving your brother’s wish to protect his son is to set up a trust through his will.

Setting up a trust

Trusts are a good way of protecting assets and people. They can be set up during your lifetime or through your will.

The type of trust that you choose is important, not only because different rules apply to different types of trusts, but to ensure that the trust is right for your circumstances.

Trusts are managed by their trustees and the person setting up the trust (the settlor) needs to appoint the trustees carefully.

These can be family members. and it is also common to have a professional such as a solicitor as one of the trustees.

Trustees have many responsibilities, especially where a vulnerable beneficiary may be unable to manage their finances personally or they could fall prey to financial abuse.

This trust can be:

An interest in possession trust

A discretionary trust

A vulnerable person’s trust

I will outline how these work and the various features which might make them more or less suitable in your brother and nephew's case.

1. Interest in possession trusts

These give the right for the life beneficiary, in this case your nephew, to have the use of an asset, such as a house, during their lifetime and/or the right to income arising in the trust but not the actual asset(s) themselves, as the ultimate beneficiary will be a third party.

In the lifetime of the life beneficiary, also sometimes described as the life tenant, the property cannot be sold, although provisions can be made in the trust deed or in the will for the property to be changed for another according to the life tenant’s needs.

There might be income from the trust, and this seems likely in your brother’s case if all his money wasn't used for the purchase of a suitable property for your nephew.

If the remaining funds were invested, and the income mandated to the life beneficiary (in other words, it went directly to your nephew) then income tax would be payable on it.

Because the life beneficiary has a right to the income, this will be taken into account if they are in receipt of means-tested benefits.

The assets would form part of your brother’s estate for inheritance tax purposes.

Capital gains tax is payable on asset disposals in a trust but there are reliefs for disposal of property that is used as a main residence providing certain conditions are met.

2. Discretionary trusts

A discretionary trust is exactly that. The trustees have complete control over the assets and the income generated from them and they decide how and when to give the income and assets to the beneficiaries.

Discretionary trusts therefore provide the trustees with flexibility, giving them discretion as to how the capital and income within the trust can be used for the benefit of the beneficiaries.

This allows the trustees to take into account a vulnerable beneficiary’s circumstances when making decisions.

Because the beneficiaries do not by the very nature of the trust have any entitlement to the trust fund itself, it does not usually form part of their estate on divorce, bankruptcy or death.

The trust fund will not be taken into account if they are in receipt of means-tested benefits.

Due to these advantages, depending on the amount put into trust, there is often a tax charge on assets put in.

There are also 10-yearly charges on the trust and exit charges when assets come out. Income tax is also payable on any income arising on the trust by the trustees.

Your brother could leave a letter of wishes with his will directing the trustees as to his wishes regarding the trust.

3. Vulnerable Person’s Trust

A VPT can be used where someone you wish to benefit falls within the definition of a 'vulnerable beneficiary'.

Vulnerable beneficiaries who qualify under this definition include:

- Children under the age of 18 who have lost a parent

- Those in receipt of certain disability benefits

- People unable to manage their affairs because of a mental health condition

An appropriate trustee needs to be appointed to manage the trust. VPTs, so long as they meet the proper criteria, can qualify for special tax treatment.

There are no 10-yearly charges as the idea is to accumulate funds to support the vulnerable beneficiary. Any capital gains tax and income tax arising are effectively taxed at the beneficiaries’ own rates.

Like a discretionary trust, the VPT is not taken into account when assessing whether the vulnerable beneficiary qualifies for benefits.

This is because, like the discretionary trust, the beneficiary of a VPT isn’t directly entitled to the trust fund.

The vulnerable beneficiary can therefore receive means-tested benefits, whilst also benefiting from the trust.

What action can your brother take now?

A good solicitor specialising in trusts and protection will be able to review your brother’s and nephew’s specific circumstances, as I do not know if your nephew would qualify as a vulnerable beneficiary.

The solicitor can then advise which trust may be the most suitable. Many solicitors will do a home visit or hold a remote meeting if your brother is not well enough to visit their office.

I also don’t know the value of your brother’s estate or the value of the house and it is worth noting that the residence nil rate band cannot be claimed against the estate for inheritance tax if the main residence or its proceeds are left to trust.

However, it would not be relevant to the estate in any case if your brother does not leave his home to his descendants directly.

What are the potential problems with your brother's current plan

With regard to your question, let me outline the pitfalls of the actions your brother has proposed.

From your brother’s perspective:

First, if your brother were to need care and his funds were depleted to the point where he needed state help, then to make a lifetime gift of the family home to you would be deemed to be deprivation of assets under the Care Act 2014.

This would give his local authority reason to challenge such a transfer, and although it would not be able to evict your nephew it could put a charge on the property.

The second issue would be that if your brother is unlikely to survive for the seven years after the lifetime gift to you, then it will still be in his estate for inheritance tax on death.

Third, if he continued to live in the house after giving it to you it would be considered a 'gift with reservation of benefit' and remain liable for inheritance tax if he did survive for another seven years, without paying full market rent which could also be deprivation of assets. 

From your perspective:

Notwithstanding my comments above regarding the issues with the gift of a house to you, once transferred the property would be in your estate for inheritance purposes.

Selling a property gifted to you in your brother’s lifetime would mean you would have to pay capital gains tax on any profit arising on any gain made.

The property would have to be transferred to you at market value as you are 'connected parties' - meaning you have a personal relationship, and this is not a commercial transaction - and so again if you sold it for a higher value, then CGT would be a consideration.

If you then transferred the cash from the sale, or if you decided to transfer the property into trust rather than selling it, then this what is known as a Chargeable Lifetime Transfer (CLT).

The gift into trust would be from you directly and you would be subject to the seven-year rule. The trust would then be liable for 20 per cent inheritance on the value of the gift into trust on any amount over £325,000.

You would also be in an awkward position if you were ill and unable to carry out your brother’s wishes or if your nephew refused to move.

You would need to ensure that your will made provision if you died before the trust was in existence.

Given the risks I have explained above, I therefore recommend that your brother speaks to a trust and protection specialist solicitor as soon as possible.