Trusts and inheritance tax planning – an introduction

They say that the two things you can’t avoid are death and paying taxes, and even the former doesn’t stop the latter. Inheritance tax used to be a tax on the very rich, but today it may affect many families.

However there are ways of reducing inheritance tax bills enormously and one of these is through the development of family trusts. This article will attempt at covering some of the basics.

What is inheritance tax?

When you pass away, the Government values your estate by taking into consideration your cash, your investments, your property and your debts. If the amount exceeds the taxation threshold, currently £325,000, then the person inheriting your estate would be charged 40% tax on anything above that amount.

Inheritance tax was introduced in order to redistribute some of the wealth inherited by the children of the aristocracy, but today many middle class families are affected by it, because the thresholds haven’t moved at the same pace as the real value of money.

What happens if all of my estate goes to my spouse?

If all of your estate is inherited by your spouse or civil partner then no inheritance tax is payable. When that person dies the nil band is increased to £625,000, less any tax free amount that was left by the other partner to anyone else. As a result, it is important to set up a will so that no arbitrary decisions are made after your passing away.

What happens if I give my money away while alive?

You can give away £3,000 each tax year without that amount being subject to inheritance tax and you can carry the amount forward for just one year. You can also give away £250 to as many recipients as you wish every tax year. You may also give away as much of your income as you wish as long as you still have enough to live on.

Any money left to charities is free of inheritance tax and there are special rules that apply to working farms and woodland.

If you give away any larger sums then they will be counted as part of your estate for the purposes of inheritance tax should you die with seven years of making the gift.

What other ways are there of reducing inheritance tax?

There are other ways of reducing inheritance tax, but require careful planning to ensure you give away only what you can afford. One of the important ways of doing this is through a family trust, often for future grandchildren.

What is a family trust?

A family trust is a way in which you can pass your assets to your next of kin. The assets will be passed from you to the trustees who then legally own them.

The trustees are obliged to look after the assets in ways that are defined by the trust and these will name the beneficiaries and stipulate how the trust must operate. For instance, you may choose for your grandchildren to receive their share of the trust when the reach a certain age.

You could also elect for your spouse to benefit from the trust while alive; for example by receiving interest from investments.  An inheritance specialist solicitor may be able to help plan the trust in a way that your loved ones get the most out of your assets.

Can trustees be beneficiaries?

Yes, they can. Trustees can also charge the trust for any expenses they incur from their duties as trustees.

What are the taxation rules regarding trusts?

Unfortunately the taxation rules regarding trusts can be very complicated, and in 2007, the rules changed so that trusts are now not as tax beneficial as they were. However they are still a way in which to reduce taxation – you may need a specialist to help you navigate the legal minefield left by changes in the law.

Should I get inheritance tax advice?

If the total assets owned by you and your spouse are less than £650,000 then your estates won’t be subject to inheritance tax, so you don’t need tax advice.  However it is still advisable to make a will.

If your estates are more than that, then it is certainly worth getting advice. A family trust might be appropriate or, depending on your circumstances, there could be other ways to reduce the tax. Talking to a solicitor could help to save your estate from a huge tax bill. You can find your local QualitySolicitors branch here.

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