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

Pilot trusts put taxpayers in the driving seat to limit IHT

By RJP LLP on 26 February, 2013

Inheritance Tax (IHT) is one of those issues that fills many clients with dread. However we live in an affluent part of the country with high property prices and inheritance tax is something that will affect most of us.Many people put off IHT planning because the thought of using lifetime planning to make outright gifts to their grown up children fills them with dread for the future! One solution to this is to put assets into trust for their benefit. This means that although you have given the assets away you still have a large element of control over how they are used, and the means to ensure they stay within the family.

Trusts have proven useful for many clients because in addition to taking care of the above practical aspects, assets put onto Trust are taken out of the IHT regime altogether - that is, apart from the IHT charge they face every 10 years. Although this 10-yearly charge is much lower than the 40% standard IHT charge which would apply if the assets were held in a person’s estate, it does add up over the generations.

One potential solution to this is the use of Pilot Trusts. These are discretionary trusts that can be set up during a person’s lifetime, and which become active upon death according to the contents of their Will.

Although this is a complex area, what is important to understand is that the use of Pilot Trusts involves setting up multiple trusts during your lifetime with minimal funds, which can then each be added to on death under the provisions of your Will, with sums which each amount to less than the value of the nil rate band. This can be a very effective form of tax planning in reducing the impact of the 10-yearly trust charge, especially for taxpayers with large estates.

Pilot Trusts are particularly useful when an individual has a large family or number of potential beneficiaries to consider in their estate planning. It is then possible to create smaller trusts for a large number of people, in order to keep below the nil rate band threshold. These forms of trust are also widely used by clients who wish to ensure their assets can pass safety to grandchildren without incurring additional tax. When considering this course if action, it is obviously important to calculate the respective costs of setting up these trusts against the amount of IHT payable, to ascertain whether this would be worthwhile.

Example: Betty has an estate worth £900,000 and she wants to ensure as much can pass onto her family as possible without incurring IHT. She has 3 sons and 3 nieces she wants to help with a small legacy. After seeking professional advice she sets up 6 individual pilot trusts for £150,000 each, to be well below the nil rate band. In each case she opens the trusts with just £10 and writes into her Will the provision for each of the 6 trusts to become active upon her death for the full £150,000.

Before acting on any of the tax planning advice we have given in this article, we must stress the importance of talking with us first. Trusts are a very complex area and all the ramifications of a particular strategy need to be considered before taking further steps. Contact Lesley Stalker by emailing las@rjp.co.uk for more information or to discuss your own circumstances.

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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.