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Business Tax  •  IHT  •  Personal tax  •  Probate and Inheritance Tax  •  Tax Planning

How can trusts be a useful IHT planning tool?

By RJP LLP on 18 August, 2011

Inheritance tax (IHT) planning can be a difficult topic to approach for many people, but once you do, the biggest concern can be the extent to which you wish each member of your family to benefit from your estate.   For some it’s down to uncertainly about who to leave their assets to, however for many, the main concern is protecting assets for future generations of their own family, and ensuring they are not dissipated by divorce. For more information on our Inheritance Tax planning services, click here.

With more parents considering private schools for their children plus the increase in university fees and the costs of house purchase, grandparents often wish to help their children financially by making provision to help their grandchildren make a good start in the world. However the concerns of retaining assets within the family still remain.

Trusts can be a useful way to finance the costs of financially assisting adult children and grandchildren whilst still retaining an element of control over assets.  In essence a trust creates a ‘family foundation’ whereby income generated can be used to give income to grandchildren at a time when they most need it, and when their tax rates are low or non-existent. This means that quite often, income tax paid by the trustees can be reclaimed by the grandchildren.

As the grandchildren get older, trust capital can be used to buy property for their use – the property can either remain a trust asset, thereby maximising control and protection, or the trust can distribute cash to the beneficiaries to enable them to purchase property themselves.

 

How do trusts work in practice?

Consider this as a typical scenario: A 55 year old with adult children and 2 grandchildren wants to make provision for his family during his lifetime but is unsure about who should benefit and by how much – he doesn’t know what the individual future needs of his grandchildren will be.  In this situation, a family trust will be an ideal solution, both from a practical viewpoint and for IHT planning purposes; the person creating the trust (known as the settlor) can be a trustee, enabling him to give parts of his estate away and yet remain some control over those assets are distributed.

The trust can be set up for the benefit of the settlor’s grandchildren (both existing and future) for example, and income and capital can be distributed depending on the needs of these beneficiaries at different times, at the discretion of the trustees. This will enable the settlor to remove the cash settled on trust from his estate; to be effective for IHT purposes it is important that he can receive no personal benefit from the cash settled, and the value of the gift will then leave his estate completely after 7 years – subject to tapering relief after 3 years.

The assets within the trust have also been ‘’ring fenced’’ from future problems ranging from divorce, misuse of funds, or the impact of bankruptcy.  It is important to note that if assets rather than cash are settled on trust there may be associated capital gains tax charges, and tax planning should be undertaken in this case.

What are the downsides to trusts?

There are cons to a trust but depending on your individual circumstances, these might not be sufficiently problematic to warrant not going ahead.  Each situation needs to be weighed up to assess the long term implications.

However the following are aspects to consider:
• Fees to create a trust vary enormously and can be anything from £500 to £5000;

• Added to the set up cost is the ongoing administration of a trust since annual accounts and an annual tax return will need to be completed;

• If a trust is held for a long period of time, it is subject to a 10 year IHT charge whereby trustees are required to pay 6% of the value of the trust over and above the tax free threshold at the time. However consider that once assets are placed on trust they no longer fall within the estate of any individual, therefore once the 7 year period following the gift has elapsed, the assets will no longer attract the 40% IHT charge that they would attract if they formed part of an individual’s estate.
On balance then, trusts can be a very useful IHT planning tool for people who want to protect family wealth for future generations.  They allow the settlor to retain an element of control over who gets their assets and when, and assets can be ring fenced to protect against future changes to a family structure such as divorce.
Ask yourself the following questions:

• Are you unsure about the extent to which your beneficiaries will need financial help?

• Are you worried that the possibility that future divorce within the family or other unforeseen problems might affect how your assets are distributed?

• Do you want to protect family wealth for future generations?
If you answer YES to these questions a trust might be a good option and probably warrants a deeper investigation.
This is the first in a special series of articles on IHT from RJP
We are running dedicated one-to-one IHT clinics on 20th and 28th September for anyone looking for advice in this area.  Please get in touch to book a slot with our IHT specialists by emailing post@rjp.co.uk.

If you are interested but unable to attend on these dates, register your interest with us and we will make sure you are invited to a future clinic. Further articles in the IHT series will be looking at:

Succession planning for the family business

IHT planning for the family home

IHT – the basics you need to know.

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There are many benefits to asking your accountant to handle probate

Did you know RJP LLP are licensed by the ICAEW to offer a full probate service.

This can save you time and money, plus we can advise on matters related to inheritance tax at the same time.