Google Adwords 0808 278 1398 Bing Ads 0808 274 4482

Can I use a trust to cut my inheritance tax?

Trusts can be a useful way of maintaining an element of control over what happens to your assets when you die. They can also, if used correctly, be a good way to reduce your inheritance tax. In this blog we look at what trusts are and how they work, some of the different types of trust, calculating tax on trusts and getting the right advice. The rules surrounding inheritance tax planning are complex, and so it’s best to get tailored advice before deciding what’s right for you.

What are trusts and how do they work?

A trust is a fiduciary arrangement that allows a third party, known as a trustee, to hold assets on behalf of a beneficiary or beneficiaries (the person or people who will benefit from the trust). Simply, a trust is a way to pass money or other assets to your loved ones or a charity.

In legal jargon, the entity who sets up a trust (companies can also do this) is known as a settlor, but can also be known as a donor, grantor, trustor, or trust-maker. Once the money or assets are put into a trust, the trustee legally owns them; it’s important that you know the trustee well and have confidence in their abilities to responsibly manage your money or assets in the way that you’d like. Depending on the type of trust, the settlor may also be the trustee, beneficiary, or both. When establishing the trust, the settlor will need to set out how the trust assets should be used, which is usually written in a trust deed.

There are lots of different types of trusts and the rules vary depending on the type. Given the complexity involved in trusts and inheritance tax planning, we always advise that professional legal advice is sought before signing anything over.

What are the different types of trusts?

The below list is by no means comprehensive but will give you a good overview of some of the options available to you if setting up a trust before you pass away.

Already have a Will and are looking to update it to establish a trust? The trust arrangements are different then the options listed below if you’re establishing a trust in your Will. Speak to our team about the differences and what option best suits your circumstances.

Bare trusts

This type of trust is used to hold assets on behalf of the beneficiary until they are ready to take ownership; for example, holding assets for a child until they are 18 years of age or reach the age stipulated in the trust deed. These types of trusts follow different rules and may be exempt from inheritance tax if the beneficiary is a direct descendant.

Discretionary trusts

This is the most popular type of trust for those undertaking inheritance tax planning. Anyone considering this trust should know that trustees are free to act at their own discretion regarding the management of the assets, and so it is even more crucial to only appoint those you trust to act in your best interests into this role. It is also important to highlight that the new inheritance tax allowance on properties cannot be claimed against property in a discretionary trust. This type of trust is able to pay any income out.

Other types of trusts

There are a vast array of trust types to suit different needs, all of which can’t be covered here. Some of the other types of trusts include:

  • Interest in possession trusts
  • Lifetime trusts
  • Mixed trusts
  • Non-resident trusts
  • Settlor-interested trusts
  • Will trusts

Are there any taxes payable on trusts?

Any assets held on trust will not be included as part of your estate, so long as you live for seven years after placing them into a trust. A common misconception because of this, though, is that you can avoid paying 40% inheritance tax on anything over the tax-free threshold of £325,000. The reality is that you will still need to pay inheritance tax for anything over this threshold, but the rate you will need to pay differs depending on the type of trust.

Example: Discretionary trust

To use the discretionary trust as an example, which is one of the most commonly used trusts for inheritance tax planning, you will need to pay 20% inheritance tax when you set up the trust for anything over the nil-rate band.

The assets in the trust will need to be revalued each decade; if the value of the assets are above the nil-rate band, then a 6% charge will be applied to the portion above the threshold.

Once the trust is closed or any assets are removed from the trust, there will be an additional charge of up to 6%, based on the most recent 10-year valuation and charged on a pro-rata basis.  

What is the cost to set up a trust?

The answer to this will depend on a number of factors, such as the type of trust, the number of beneficiaries, the monetary value of the assets, and the complexity of the arrangements you’d like. While we can’t give you an exact cost figure in this blog, we can certainly give you a quote after finding our more about your circumstances – take advantage of our Free Initial Assessment to find out more.

Setting up a trust can be a great way to save on inheritance tax if you’re using them in the right way, but they can also be costly to set up and so there needs to be a balance in what you’re trying to achieve. Setting up a trust for the sole purpose of avoiding inheritance tax shouldn’t be your main motivator. Speak to our private client team to get tailored advice and see if a trust is right for you.

Where can I get advice on trusts?

Estate, inheritance and trusts are specialised areas of law and so it’s important to seek advice from a solicitor with knowledge and experience in this area. Our private client solicitors have the legal know-how as well as the practical know-how to guide you in this complex area. We can help you to consider a range of different options and circumstances so that what you’d like to have on paper actually reflects how the trust will work in real life.

We are local to you with solicitors in Wrexham and Mold – we can of course also accommodate and advise those further afield. A lot of our instructions can be taken via phone or email and so there wouldn’t be a need to travel to us if inconvenient to you.

Call us today for a Free Initial Assessment on 01978 884 125.

Expert legal advice you can rely on,
get in touch today:

Please let us know you are not a robot