How Trusts Could Help you Save on your Inheritance Tax Bill Following on from the changes to Inheritance Tax in the Autumn Budget and the ripple effect across our clients, Simon Hurren looks at the pros and cons of using Trusts to mitigate Inheritance Tax costs.
Firstly, it’s important to understand what a Trust is. Simply put, a Trust holds assets for either individually named beneficiaries or potentially a class of beneficiaries, such as ‘all of my future grandchildren’. Trustees manage the Trust assets in the best interest of the beneficiaries and where the Trust is discretionary (i.e. the Trustees can decide when and how much to appoint to any of the beneficiaries) the Trustees retain control over the assets and the amount of benefit the beneficiaries have, depending on the original intention of the Trust. The person who sets up the Trust can also be a Trustee. So why use a Trust? Trusts are a fantastic tool for asset protection. And this can be particularly important where the beneficiaries may not yet be of an age where you are happy for them to have access to the full asset (would you be happy for your 18-year- old child or grandchild to have £1 million outright?). However, you’d like them to benefit from the assets, whether that’s a property to live in or to benefit from the income generated.
Trusts can also help to protect assets should the beneficiaries get divorced. The rules and case law is complex in this area so it’s important to take advice on the structure of the Trust and how this could be used should the beneficiaries get divorced in the future. But Trusts offer potential protection that would not be there if the asset was otherwise owned directly by the beneficiary. From an Inheritance Tax perspective, any transfers into Trust are outside of your Estate after 7 years. This therefore allows you to start the 7 year clock whilst retaining some control over the assets. There can be an immediate charge to Inheritance Tax where the value of the initial transfer exceeds your available nil rate band so advice should be taken before any transfers are made. Discretionary Trusts fall into the relevant property regime and are subject to Inheritance Tax charges every 10 years (sometimes referred to as the 10-year charge). The calculations for this are complex but the maximum amount of IHT payable on the 10-year anniversary is 6% which is substantially lower than the full rate of IHT of 40%.
8 | SCRUTTON BLAND | PRIVATE CLIENT
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