As much as I try my best to start these articles on a positive note, this may be the exception to that rule in that if you’ve heard the phrase ‘there’s only two things that are certain in life – death and taxes’ then this article covers both!
However, let’s swing the sails back around and look at what we can do to minimise the impact of what’s aptly named as ‘the death tax’ (Inheritance Tax – IHT) by looking at how we can use different types of trust funds to help protect your legacy.
In addition to making a Will, trusts are the cornerstone of good IHT planning, having been used for many years to help resolve issues over how your estate is distributed as well as to reduce your tax liability.
Each individual has a nil rate band allowance of £325,000 or £650,000 for married couples (2015/16). Anything above this amount is currently taxed at 40%.
A trust is a formal arrangement where you (the settlor) transfer legal ownership to a trustee who is designated to look after the assets from your estate on behalf of your beneficiaries. Trusts can be set up whilst you are still alive or written into your Will to take effect after death. They are generally used when there are child beneficiaries or beneficiaries who are incapable of looking after their own affairs.
Most trusts can be written as either an absolute trust or a discretionary trust, depending on your circumstances.
Absolute Trust Funds:
- You are required to select both the beneficiaries and their fund share when the trust is set up
- Beneficiaries cannot be changed once the trust has been set up.
- All capital growth is immediately classed as outside of your estate and the trust itself will not be subject to any periodic or exit IHT charges.
- Each beneficiary’s share of the trust fund will be treated as forming part of their estate for IHT purposes.
- HMRC do not require details of absolute trusts to be disclosed to them at present
Discretionary Trust Funds:
- Can be used if you are undecided on distribution of your assets or to allow for future beneficiaries – children or grandchildren for example as you do not have to name them at the time of setting up the trust and therefore the trustees have the flexibility on who will benefit from the trust assets.
- May incur IHT charges during lifetime and after death depending on the value of the trust.
- They carry an HMRC requirement to disclose details of the trust at specified times.
- May incur ongoing charges for advice given to the trustees and settlors (although trustees should not pay for ongoing advice given to you (the settlor) as that could be regarded as a breach of trust with adverse tax consequences).
The following is an example of the some of the different types of trust funds available:
|Type of Trust||Description|
|Discretionary Will Trust||
|Discounted Gift Trust||
|Spousal bypass trust||
These are just a few of the different types of trusts available. Choosing the right ones for your circumstances can be complicated, so it is important to seek advice to ensure you make the most of these strategies in your IHT planning.
The purpose of this article is to provide technical and generic guidance and should not be interpreted as a personal recommendation or advice.
These links may be useful: www.moneyadviceservice.org.uk and www.direct.gov.uk
Twitter users: Martin Lewis of MoneySavingExpert tweets general advice and also answers some personal finance questions- @MartinSLewis and @Moneysavingexpert
The Which? Money team (@WhichMoney) tweet smart money guides.