Whilst tax legislation may have stopped trusts being a tax haven for the wealthy they certainly have their place in estate planning and when used correctly they can certainly help to reduce an IHT liability.
For those who may be considering the creation of a discretionary trust either on death or as part of lifetime planning, there are two recurring charges to IHT which must be considered.
At the point a trust is created, the assets being transferred into the trust are valued for IHT purposes. As long as the assets going into the trust are valued at less than £325,000 (or the current NRB) there will be no IHT to pay on the creation of the trust and it is treated as a PET.
The assets within the trust are re-valued every 10 years. If the trust is valued at more than £325,000 at the 10 year anniversary and there are no exemptions or reliefs then IHT will become due. The calculation for IHT is complex but will be charged at a maximum rate of 6% on the value over the NRB.
In addition, every time assets are appointed out of the trust to beneficiaries, there will be a charge to IHT. Again, the rate of tax is complex to calculate but it will be at a maximum rate of 6%. However, appointments out of the trust do not take into account the NRB and the tax charge will apply to the whole value being distributed. If on the creation of the trust, it was valued at less than the NRB, any appointments out of the trust in the first 10 years will be taxed at 0%.
The creation of a trust is still a great planning tool when you wish to reduce your own estate for IHT purposes but do not think that your beneficiaries are in a position to receive a lump sum outright. A trust provides an element of protection for beneficiaries who may still be too young or inexperienced at managing money.
This means that you can gift assets now of a value up to £325,000 so that they fall outside of your estate for IHT purposes in 7 years, but control is not handed to the ultimate beneficiaries for another 9.5 years.
If you are considering making a gift to a beneficiary either in lifetime or in your will, but would like an element of protection over the way funds are spent, please get in touch and we can talk you through the taxation of discretionary trusts in much more detail.
These notes have been prepared for the purpose of articles only. They should not be regarded as a substitute for taking legal advice.