Use of trusts
Protecting assets from separation or divorce
When acquiring UK property, aside from seeking legal support on conveyancing, purchasers should seek advice on the broader tax and legal implications. As with any substantial acquisition or investment, there will always be potential pitfalls. Taking advice from the outset will enable proactive planning and help to avoid costly future challenges.
Use of trusts
While the use of trusts to hold UK residential property can potentially offer some degree of asset protection when compared with outright personal ownership, this protection may not be as robust as clients would like.
For instance, in the event of a divorce, trust assets can be considered a financial resource available to the spouse who is a beneficiary (although this will depend on factors such as the terms of the trust and distribution patterns) and the trust may even be treated as a nuptial settlement if it is settled by:
- one spouse;
- both spouses; or
- a third party for the benefit of one of the above.
If a court finds that the trust is a nuptial settlement (which is comparatively rare but not unheard of in case law), it will have extensive powers to, among other things:
- change the terms of the trust;
- remove or replace trustees; and
- order distributions.
The use of trusts might also be unattractive from a tax perspective. For instance, the value of the property would suffer an inheritance tax charge of up to 6% every 10 years while it is held in trust. The property would also continue to form part of the settlor’s estate (and so be subject to inheritance tax upon their death) unless they were irrevocably excluded from benefitting. Excluding the settlor from benefitting is unlikely to be practical if they wish to occupy the property. Further, holding the property in trust would give rise to reporting obligations for the trustees, which would need to report the existence of the trust and details of its beneficiaries to Her Majesty’s Revenue and Customs through the Trust Registration Service.
As a result, there are only limited scenarios in which trust ownership will be appealing. In general, direct personal ownership will be the preferred route for the family home.
Protecting assets from separation or divorce
Nuptial agreements
A pre-nuptial agreement offers the best degree of protection for UK property as regards divorce settlement. Parties can:
- define marital property (which is to be shared);
- separate property (which is to be ringfenced); and
- set out levels of spousal and child maintenance payable on separation.
Provided that the agreement meets the parties’ respective needs, and those of any children, it will generally be considered binding.
There are many reasons why people have a nuptial agreement, including if:
- there is an actual or expected disparity between the wealth of the spouses;
- there are assets which have been in one of the parties’ families for generations that a party would like to protect against divorce; and
- it is not a first marriage and a party wishes to preserve assets for children of a previous marriage.
The aim of such agreements is to provide certainty and security if the marriage breaks down and provide more power to a couple to make arrangements for the future, rather than leaving everything up to the court. Above all else, a pre-nuptial agreement saves acrimony and potentially significant costs if the couple concerned were to divorce.
UK pre-nuptial agreements are not automatically enforceable; instead, they are guided by UK case law. This case law states that the starting point is that nuptial agreements will be upheld but they must meet certain conditions, including that:
- the pre-nuptial agreement has been entered into freely;
- each party has taken independent legal advice;
- there has been full financial disclosure by both parties; and
- the agreement is fair.
Cohabitation
There can also be a risk of claims against property on the separation of unmarried cohabitees. While there is no such thing as common law marriage in England and Wales (and the starting point on the separation of unmarried cohabitees is that neither party will have any ongoing financial obligations towards the other), there are numerous means through which one party can make a claim against the other with respect to property.
In England and Wales, the legal framework around cohabitation contains many potential claims that can call on various different areas of law to make a claim, including:
- property;
- family;
- trust; and
- children law.
Some examples of this include:
- claims for the benefit of children – the court could make a settlement or transfer of property order in order to provide a home for the child while they are a minor (any capital awarded to purchase a property is likely to be held in trust until the child turns 18 or leaves full-time education, at which time it will revert to the payer);
- trusts of land – one party may be able to rely on actions during the course of a relationship (eg, conversations, oral agreements or regular payments towards outgoings in relation to the property) to establish a beneficial interest pursuant to an implied, resulting or constructive trust. The latter is most relevant in a domestic context. Alternatively, a party can rely on proprietary estoppel to claim a beneficial interest. In this context, they must show:
- an assurance on the part of the other party (eg, that may have led them to believe that they will have some right in relation to the property);
- that they relied on the assurance to their detriment; and
- that it would be unconscionable for the other party to deny them the right that they expected to have.
In terms of protection, a cohabitation agreement is recommended. This allows parties to regulate the terms of their cohabitation, providing clarity both during the relationship and in the event that it should break down.
The agreement would incorporate or be accompanied by a declaration of trust in relation to any real property, confirming the parties’ respective beneficial interests. The agreement can also deal with a wider range of issues, including:
- how household expenses are to be split;
- what happens if one party wishes to sell the property and the other does not;
- financial support during and after cohabitation; and
- living arrangements and financial provision for any children.
Security and clarity on this matter is extremely beneficial to a couple if the relationship breaks down in the future.
For further information on this topic please contact Rosie Schumm or Emma Gillies at Forsters LLP by telephone (+44 20 7863 8333) or email ([email protected] or [email protected]). The Forsters LLP website can be accessed at www.forsters.co.uk.
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