How to Avoid Inheritance Tax With a Trust

You may want to ensure that your loved ones inherit as much of your estate as possible after you pass away. Prestige Tax and Trust Services explains how to avoid inheritance tax with a trust.

Inheritance tax

The UK government requires you to pay inheritance tax of 40% on the value of your estate (money, possessions etc.) if it’s worth more than a certain amount when you die. At present the inheritance tax limit is £325,000 meaning your estate will pay 40% on anything over and above this amount.

For example, if your estate is worth £500,000, it would have to pay 40% inheritance tax on £175,000. If you want to ensure your loved ones inherit as much of your estate as possible, you’ll want to think about how your estate can avoid paying inheritance tax.

Explaining trusts

Setting up a trust can be an effective way of reducing your estate’s inheritance tax bill. A ‘trust’ is a legal instrument you can utilise to manage your assets both when you’re alive and after you die. There are three roles in a trust that you need to know about:

  • Settlors: The people who create the trust e.g. you. There can be more than one settlor.
  • Trustees: The people who are the legal owners of assets held in the trust and are responsible for managing it. Trustees are appointed by and can be removed by settlors.
  • Beneficiaries: The people who benefit from the capital contained in, or the income generated by, the trust. There can be more than one beneficiary.

Basically, when you put assets into a trust you no longer own them. Legally they belong to the trustee, who’s responsible for looking after them on behalf of the beneficiary. Therefore, usually any assets you place in a trust aren’t counted towards your estate’s inheritance tax limit when you pass away. However, some types of trust have to pay inheritance tax in their own right, while others might be obligated to pay capital gains or income tax.

Setting up a trust

Theoretically, you could create a trust to put some of your savings into, so your children can inherit some money free of inheritance tax when you die. Also, establishing a trust provides you with an immediate, probate-free way of transferring assets to beneficiaries after you die.

There are two ways to set up a trust – you can do so immediately by completing a ‘trust deed’ or you can write one into your will, depending on the type of trust you wish to create. In both instances, you’ll need to name the trustees, beneficiaries and the rules of the trust. For example, you could say that the beneficiaries may only inherit the assets held into the trust once they reach a certain age.

Prestige Tax and Trust Services

Using trusts to avoid inheritance tax, so your loved ones inherit as much of your estate as possible is complex. This task requires specific legal knowledge, so that you can utilise the correct trust to shield your estate from inheritance tax effectively. We provide the trust services you require to ensure you can look after your loved ones after you’ve passed away.


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