Trusts, Care Home Fees and Inheritance Tax: Separating UK Legal Reality from Marketing Myths

Across the UK, homeowners are regularly approached by unregulated marketing schemes selling expensive lifetime 'Asset Protection Trusts' or 'Family Protection Trusts' with promises that transferring your house into a trust during your lifetime guarantees it cannot be assessed for future residential care costs.

Legal regulators, STEP, Age UK and the Competition and Markets Authority (CMA) have repeatedly cautioned consumers about these claims. No trust structure can guarantee immunity from a local authority financial assessment, and transferring your main residence into a lifetime trust without full legal and tax advice can leave you worse off financially while failing to achieve the promised result.

In England, local authority means tests for care and support are governed by the Care Act 2014 and Annex E ('Deprivation of Assets') of the Care and Support Statutory Guidance (with equivalent anti-avoidance rules in Wales, Scotland and Northern Ireland).

When assessing capital, the local authority asks two core questions: first, whether avoiding or reducing a care charge was a 'significant operative purpose' of the transfer; and second, whether at the time the asset was placed into trust, the person had a reasonable expectation of needing care and support and a reasonable expectation of needing to contribute towards its cost.

Crucially, there is no '7-year rule' for care fees. The widely quoted 7-year rule is an Inheritance Tax rule for lifetime gifts between individuals. Local authorities have no statutory time limit on how far back they can examine transfers into a lifetime trust. If the council concludes that deliberate deprivation occurred, it can assess you as still holding the property as 'notional capital' or use powers under Section 70 of the Care Act 2014 to recover charges from the recipients or trustees.

Putting your home into a lifetime trust also carries significant tax implications. Under Section 102 of the Finance Act 1986, if you give away an asset (or settle it into a trust) while continuing to live in it or enjoy a benefit from it without paying full market rent, HM Revenue & Customs treats it as a 'Gift with Reservation of Benefit' (GROB). A GROB means the property is still treated as part of your taxable estate for Inheritance Tax when you die, while potentially losing the Residence Nil Rate Band (up to £175,000 per person) if property does not pass closely to direct descendants on death.

Furthermore, most lifetime transfers into a trust are 'Chargeable Lifetime Transfers' under the Inheritance Tax relevant property regime. Any value transferred above the settlor's available £325,000 Nil Rate Band can trigger an immediate 20% lifetime IHT entry charge, followed by 10-year periodic anniversary charges and exit charges of up to 6%.

Business owners and agricultural landholders should also note that from 6 April 2026, reforms to Business Property Relief (BPR) and Agricultural Property Relief (APR) cap combined 100% relief at £2.5 million (with 50% relief above that cap), making bespoke tax and legal advice essential before settling business or farming assets into trust.

It is important to distinguish risky lifetime home-transfer schemes from a traditional Life Interest Trust (often called a Property Protection Will Trust) written inside a couple's wills.

Under a will-based life interest arrangement, the couple sever their joint tenancy so each spouse or partner owns a distinct 50% share of the home as tenants in common. While both partners are alive, nothing changes: they still own their home in their own names. Only when the first partner dies does their 50% share pass into the will trust, giving the surviving partner the right to live in the property for the rest of their life while preserving the deceased partner's 50% capital share for the children.

Because the deceased partner's half-share belongs to the will trust rather than to the surviving partner outright, it protects that half-share from sideways disinheritance if the survivor later remarries, and only the survivor's own 50% share belongs to them personally. Whether a will trust is appropriate always depends on the value of the property, the Residence Nil Rate Band, any outstanding mortgage and individual family circumstances.