Inheritance tax planning series – Using Trusts

Inheritance Tax (IHT) can significantly reduce the wealth you pass on to your loved ones. In the UK, IHT is levied at 40% on estates above the £325,000 nil-rate band (or £500,000 if the residence nil-rate band applies). One effective strategy to mitigate IHT is setting up a trust in lifetime. Trusts allow you to manage how your assets are distributed, potentially reducing your taxable estate while ensuring your wishes are met. This article outlines the process of setting up a trust for IHT planning and highlights why Trusted Tax Advice is the go-to advisor for expert guidance.

What is a Trust?

1. Reduce IHT Liability: Assets placed in certain trusts may no longer form part of your estate for IHT purposes, lowering the taxable value.
2. Control and Flexibility: Trusts allow you to dictate terms, such as when beneficiaries receive funds (e.g., at a certain age) or how assets are used.
3. Protect Assets: Trusts can safeguard assets from creditors, divorce settlements, or irresponsible spending by beneficiaries.
4. Provide for Loved Ones: Trusts can support minors, vulnerable individuals, or those needing long-term financial security.

1. Bare Trusts:
   • Assets are held for a beneficiary who has an immediate right to them (e.g., at age 18).
   • Simple and cost-effective but offer limited IHT savings, as assets are treated as the beneficiary’s for tax purposes.
2. Discretionary Trusts:
   • Trustees have discretion over how and when to distribute assets to beneficiaries.
   • Ideal for IHT planning, as assets are removed from your estate (subject to a potential IHT entry charge and periodic taxes).
   • Useful for complex family situations or protecting wealth.
3. Interest in Possession Trusts:
   • A beneficiary (e.g., a spouse) receives income from the trust during their lifetime, with capital passing to others (e.g., children) later.
   • Can defer IHT while providing for loved ones via a Will.
4. Loan Trusts:
   • You lend money to the trust, which grows outside your estate. You can still access the original loan, but growth is IHT-free.
   • A low-risk option for those wanting access to capital.
5. Discounted Gift Trusts:
   • You gift assets but retain the right to income, reducing the gift’s value for IHT purposes immediately.
   • Complex but effective for high-net-worth individuals.

• Tax Implications: Gifts to trusts may incur immediate IHT charges if they exceed your nil-rate band. Discretionary trusts face periodic and exit charges, so precise calculations are crucial.
• Seven-Year Rule: If you die within seven years of making a gift to a trust, it may still be subject to IHT, though taper relief could reduce the tax.
• Costs: Setting up and managing a trust involves legal, advisory, and potential tax costs. Weigh these against the IHT savings.
• Loss of Benefit: Once assets are in a trust, you would lose the benefit of the capital added.

1.  Work with a tax advisor to:
   • Define Your objectives
   • Assess Your Finances
   • Choose the Right Trust
   • Choose your Trustees
2.  A solicitor drafts the Trust Deed
3.  Transfer Assets into Trust
4.  Register the Trust with HMRC
5.  Monitor and Review the Trust

• Expertise in IHT Planning: Trusted Tax Advice specialises in tax-efficient strategies, helping you select the right trust to minimise IHT while meeting your goals.
• Tailored Solutions: We assess your unique financial situation, family needs, and long-term objectives to craft a bespoke trust strategy.
• Comprehensive Support: From liaising with solicitors on the trust deeds to liaising with HMRC, Trusted Tax Advice ensures compliance and maximises tax savings.
• Trusted Reputation: With a proven track record, we offer peace of mind that your estate is in capable hands.
• Ongoing Guidance: We provide regular reviews to adapt your trust to changing laws or circumstances, ensuring lasting benefits.