How Can a Trust Help to Cut Your Inheritance Tax

Trusts are increasingly being considered as a means of reducing your inheritance tax. Through putting your money into a trust, you no longer own it. This means it might not count towards your Inheritance tax bill when you die.

What is a trust?

A trust is a legal arrangement in which you give cash, property or investments to someone else so they can look after them for the benefit of a ‘beneficiary’.

There are two important roles in a trust, a trustee and a beneficiary. A trustee is the person who owns the assets in the trust and therefore has the power over it. The trustee’s responsibility is to run and manage the trust responsibly.

A beneficiary will inherit the trust. It is set up for them and they are usually unable to manage the trust themselves. This is most likely due to age, as many beneficiaries are children. The assets are held in the trust for the beneficiary.

Conditions of a trust

There are a few conditions that must be met when you are using a trust. Government rulings state that if you die within 7 years of a transfer into a trust, the estate will pay the death duty at the full rate of 40 per cent. If payment is made to a trust during the trustee’s lifetime and they do not die within 7 years, the charge will be around 20 per cent.

While this is a standard, there are many different types of trust that offer different rates of return. It is worth speaking to a financial professional about your options.

The different types of trusts

The kind of trust that you choose should be based on your situation. It is important to know what kind of trust you have as these all offer different rates of tax, including income, inheritance and capital gains tax. Here are the most common types of trust.

  • Bare trust – this simple trust pays out the full amount to the beneficiary straight away, as long as they are over 18.
  • Interest in possession trust – the beneficiary can receive income from the trust immediately, but does not have access to the cash, property or investments that generate income. The beneficiary will also need to pay income tax. This type of trust in most popular with people who have remarried but still have children from the first marriage, as the second spouse can benefit yet the investments will still go to the children.
  • Discretionary trust – in this case, the trustee has absolute power over how the assets are divided. The trustees will make investment decisions on behalf of the trust. This is popular with grandparents setting up trusts for their grandchildren, as it allows the child’s parent to decide how to divide income and capital.

The benefits of a trust

Putting money or assets into a trust can protect your loved ones from liability. Once the property is held in trust, it is outside of anyone’s estate for inheritance tax purposes. Furthermore, it acts as a means of retaining control and asset protection for the beneficiary. It avoids handing over valuable property or investments or large sums of money while the beneficiary is still young.

Trusts can run for up to 125 years, so can cover a wide range of people and generations. This helps to provide ongoing support for your family for years to come.

Trust law is complicated. To make sure that you set up your trust correctly, it is vital that you get professional help. This will ensure your assets and make sure the trust system is right for you.

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