Trust and Inheritance Tax Planning


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What is a trust?

A trust is a legal arrangement used to protect and manage your assets and preserve family wealth for future generations, allowing you to protect your wealth and minimise inheritance tax.

The trustees of a trust have the legal ownership of the property settled in the trust by the settlor. They hold it and have the power and duty to manage it for the benefit of the beneficiaries.

Trusts come in different forms, including discretionary, life interest and bereaved minor trusts.

UK domiciliaries usually establish a trust during their life to hold assets such as savings accounts, pensions and insurance policies.

Offshore trusts also play a central role in tax planning of foreign domiciliaries for asset protection and succession strategies.

Tax laws around trusts are complex, and you could pay an immediate inheritance tax charge if you don't structure them carefully.

What does a trust do?

Trusts can be used for many different purposes. They're often referred to as ''estate planning" tools because they help to manage assets during your lifetime and administer your estate after your death - making sure everything gets passed on to the people you want it to go to.

They can also be a powerful way of reducing inheritance tax exposure and, if carefully structured, they can be an instrument for non-domiciliaries to defer some income and capital gains tax.

Therefore, due to income tax and capital gains tax anti-avoidance legislation trusts are essentially one of the most common tools for inheritance tax planning.

Trusts for Succession & Inheritance Tax planning

The estate of a UK domiciled individual is chargeable to inheritance tax at death regardless of where the assets comprised in the estate are located.

Inheritance tax is charged at 40% on the value of the estate above the nil rate band of £325,000 after deducting liabilities and reliefs.

When gifting assets to a trust, the transfer will generally be subject to an entry charge at 20% unless a relief applies.

A trust is also subject to a 10 year anniversary charge every ten years from its creation on the value of its estate and an exit charge at 20% when capital is distributed to the beneficiaries.

Therefore, in most cases using a trust is only a way to defer rather than avoid inheritance tax.

For non-UK domiciliaries things are different and a transfer of foreign situs assets to an offshore trust when the settlor is non UK-domiciled will not trigger any inheritance tax charge.

In the same way the trust will not be subject to the 10 year anniversary or exit charge if the trust is an excluded property trust meaning that its estate only includes non-UK situs assets.

This will be the case even if the individual will become deemed domiciled or domiciled in the UK after making the settlement.

The protection from inheritance tax given by an excluded property offshore trust will continue even after the non-domiciled settlor’s death until the settlement lasts.

Administration of trusts

Trustees hold several responsibilities, including:

  • Holding regular meetings and keeping records
  • Ensuring that the trust is being managed appropriately and complying with any special rules that apply to the trust
  • Making distribution decisions and ensuring that the terms of the trust agreement are adhered to
  • Providing beneficiaries with information about how the trust fund is being used
  • Reporting to HMRC

Shall I use a trust?

For non-domiciled individuals offshore trusts can be a very useful tool for inheritance tax protection. The same trusts can also be used for income tax mitigation to some degree and until the individual is not deemed-domiciled.

For UK domiciliaries the use of a trust for inheritance tax purposes may be less appealing.

Therefore, tax is only one of the reasons why a settlement could be made.

Other advantages of using a trust include succession planning and for non-domiciliaries using offshore trusts, the avoidance of probate in countries where the assets are situated.

Trusts also confer general asset protection from risks such as bankruptcy or divorce.

How our professional trustee services can help you

We're here for you every step of the way. Our expert trustee team works closely with you and your advisers to ensure that your trust continues to be an effective vehicle for achieving your goals.

They have specialist knowledge which helps you plan and keep your trust assets growing.

Our team will help you in setting up a trust according to your own needs and to protect you from risk factors, tax changes, inheritance tax rules and advice on tax reliefs and transfer of assets both in and out.

They also help you plan for future generations and ensure that your wishes stay clear and that your loved ones are taken care of.

To see how we can help you please contact us at 02076 312 061 or fill in the enquiry form and one of our experts will be in touch shortly.

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