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How Can I Reduce My Inheritance Bill With A TRUST ?

Avoid Inheritance Tax – Put everything in a trust.

Makes sense right. Leave nothing on death and make sure there is no tax to pay.  Well, this is what ‘they’ would have you believe.

It is a myth. But trusts do serve a purpose.

The use of trusts  goes back a long way. They were used by the Norman Invaders of England back in the day as a ‘wealth preservation tool’ and if that is not completely accurate then most certainly during the time of the Crusades when the Kings Knights were asked to go and fight in distance places a trust was used to preserve the wealth of those lucky enough to have some. 

At the time terms like ‘beneficial ownership’ were added along with terms like ‘perpetuity’   becoming  legal frameworks to preserve assets in later years. Subsequently laws were introduced to prevent perpetuities and the accepted maximum term of a trust is 125 years. 

An individual Last Will and Testament creates a trust. “I give to my trustees…” 

A trust consists of five things. 

  1. A trustee
  2. A donor (settlor) – the person creating the trust.
  3. The beneficiary – the person or body the benefits from the trust.
  4. Assets
  5. A timeframe

There are also different types of trust

  1. Bare trust
  2. Accumulation and maintenance trust.
  3. Interest In Possession trust (like in a Will)
  4. Discretionary trust
  5. Mixed trust
  6. Accumulation trust

Each one of these has a different purpose and slightly different methods of taxation but they are taxed. 

Each one has charges attached to  it, for managing, for it’s tax returns, for meeting trustee obligations, making investment decisions and possibly legal and other costs.

Each one has it’s own legal identity – think Limited Company. Only trusts (in my opinion) are a little more complicated than Limited Companies.

Trustees need to be appointed – obviously.  Appointing these will incur costs and effects. Some of these issues…

  • What will those costs be? Who are these people? What happens if they cease trading? 
  • Who controls it/them/?
  • If you transfer any asset to a trust you will lose control of it, it will then belong to the trust. 

You also need to be aware of tax.

  • Chargeable lifetime transfers – Inheritance Tax paid today.
  • Income and capital gains taxes.
  • Stamp duty on transfer to the trust.
  • Ten year tax charge.

Trusts are not tax exempt.

You also have to be aware of the costs of transfer, share and property are effectively treated as sale and are likely to have Capital Gains Tax levied and of course there is the Stamp Duty issue and the potential issue of mortgages. 

Potentially exempt transfers mean that transfer of assets could make some sense provided you survive 7/14 years ( for Chargeable Lifetime Transfers)

Other Factors In Relation To Trusts

Borrowing  in relation to investment property

Loss of access to capital and income.

Tax returns and changes in legislation. 

Trusts have a part to play, but they are not the panacea and certainly not a cure all  for those ‘rentiers’ who are looking to reduce income or inheritance taxes.  No matter what you are told, there isn’t anything that is tax free and rules in place now probably won’t apply on your death. 

That said, if you are looking to provide a lump some or income for dependent children or family members then pensions or life insurance/assurance plans still make some sense. 

Also, family investment companies should not be ignored.

Careful thought needs to be given to any considerations. For large estates trusts have a part to play, they do offer certainty but not the tax breaks you think they offer.

If you are being offered a trust as a solution – buyer beware. They really are not what they seem.

When you are ready to get some more on this. Please get in touch. I can offer you a ‘Borrow My Brain‘ where we will help you solve some of these problems. Or you can get in touch .