Inheritance tax trusts could be ‘powerful’ tool to reduce inheritance tax burden | Personal Finance | Finance
The inheritance tax (IHT) allowance threshold has been frozen at £325,000 since 2009, despite the rocketing house prices and inflation rates sweeping Britain over the past 14 years. As this continues to push thousands more families into the 40 percent IHT tax bracket, many may be looking for ways to reduce their bill, and trusts could be the answer, experts have said.
Inheritance tax is charged on a person’s estate, such as property, money, and possessions, if the total value exceeds £325,000. If total assets exceed £325,000, a 40 percent tax is applied to the rest of the estate.
However, there are ways to pass on more to loved ones without the large tax bill that could come with it.
Dr Roger Gewolb, founder of campaignforfairfinance.org
“But the end result of all the different combinations is that the people who inherit your estate when you die don’t suffer inheritance tax on the assets you leave them before they get their hands on them.”
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What can trusts be used for?
Trusts may be established in various ways, depending on the trustor’s goal.
Shaun Robson, partner and head of wealth planning at Killik & Co, said: “Unlike a gift for IHT planning, which must be made outright, a trust can provide a way to keep control of an asset whilst potentially reducing the IHT bill. The trust can prevent the asset from being mismanaged by a beneficiary, which can be particularly useful for families with vulnerable beneficiaries like minors or individuals with disabilities.
“By preserving and managing the assets over time, they can be passed to future generations in a responsible and sustainable way. As an example, trusts can be used to provide for school fees for younger beneficiaries.”
However, it’s important to be aware of what opening a trust would mean for the original owner of the assets.
Dr Gewolb explained: “What so many professional advisors pushing the benefits and dealing with the complexities and intricacies of these instruments don’t emphasise enough is the more fundamental questions and decisions that need to be made before you even enter this labyrinthian world.
“For example, a trust – any kind of trust – basically means you are giving away your assets to someone else.”
The trustee, which is the person who would then run the trust and manage the asset, would then own it. This means it would no longer be in the original owner’s possession.
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“Settlor-interested trusts give the settlor an interest in trust assets, and non-resident trusts are established outside the UK but have UK-resident beneficiaries or assets.”
However, each trust has distinct benefits, drawbacks, and tax implications making it imperative to seek professional guidance before setting one up to ensure it’s suitable.
Mr Robson added: “Usually as the complexity increases, so does the costs to set them up. It is important to get things right from the outset and seek professional advice [beforehand].”
