Using Trusts is one way to move money out of your Estate in order to reduce your Inheritance Tax (IHT) bill
A Trust allows you (known as the Settlor) to entrust your assets to a group of people (known as the Trustees). The Trustees are the legal owners of the assets and manage these for the benefit of your Trust’ s beneficiaries. It is the Trustees’ responsibility to manage and ultimately distribute the Trust fund to the beneficiaries.
At Boolers, we provide trust planning advice and management throughout Leicester and all surrounding areas. Our team will review your circumstances and only advise a trust if it is relevant to you and will benefit your financial situation. Our team can also manage the running of a trust already in place.
As well as potentially reducing your IHT liability, the use of Trusts also avoids lengthy probate delays and ensures that your beneficiaries can benefit from your Estate as quickly as possible. However with some Trusts you have to forgo access to some or all of the original capital as well as any future growth.
There are some Trusts that will allow access to your original capital, either as ad-hoc repayments or through a regular ‘ income’ in the form of fixed withdrawals. However, the Trust needs to be established correctly to avoid any “gift with reservation” issues, which would mean the asset was still classed as being inside your Estate for IHT purposes.
A Trust can reduce your IHT liability by transferring assets progressively out of your Estate. The IHT liability on these assets will reduce in stages over a seven year period and after seven years, the assets will be outside your Estate and therefore exempt from IHT.
Transfers out of your Estate are considered as either Chargeable Lifetime Transfers (CLTs) or Potentially Exempt Transfers (PETs) and this depends on the type of Trust chosen. There are a number of differences between the types of Trust, especially the tax treatment, both initially, ongoing and on exit. Whichever route is chosen a Trust can significantly reduce your IHT liability, regardless of whether you survive the seven year period.
Most Trusts are set up on either a Bare or Discretionary basis. A Bare Trust is where the settlor is excluded from benefiting from the Trust. The Trust assets are held for the benefit of the named beneficiaries, by the Trustees, absolutely. The Trust is not flexible and cannot be changed. With a Discretionary Trust, the trust assets are held for the benefit of the beneficiaries by the Trustees who have the discretion as to who will benefit from the Trust.
A comparison between the two different types of Trust is given below
| Bare Trust | Discretionary Trust |
|---|---|
| Initial gift is a potentially exempt transfer, no immediate IHT consequences of making the gift | Initial gift is a chargeable lifetime transfer, immediate charge to inheritance tax if amount of gift is in excess of client’s available nil-rate band |
| Minimal trust administration and no ten year charge or exit charge | Settled property regime applies with reporting requirements and ten year charge and exit charge |
| Beneficiaries must be named at the outset and it’s not possible to change them or to benefit future generations | Flexibility maintained as beneficiaries can be changed according to circumstances and future generations catered for |
| Lack of control – beneficiaries are absolutely entitled to the trust fund and can demand it at any time once they reach age 18 | Maintain control as trustees have complete discretion over who benefits and when |
| Trust fund is in beneficiaries’ estates for IHT purposes | Trust fund is not in any individual’s estate |
| No protection against claims by third parties (for example on divorce or bankruptcy of beneficiary) | Greater protection from third parties as beneficiaries benefit only at the discretion of trustees |
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