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How to avoid inheritance tax with a trust

Trust’s are seen by some as a way of escaping inheritance tax. The truth is, a trust is used to hand over ownership of an asset for a specific purpose and tax considerations are really a secondary consideration

You will avoid inheritance tax with a trust by transferring ownership of assets to that trust which has the effect of reducing the value of your overall estate for inheritance tax purposes.

When you pass away you may want your estate to pass on to your children or other loved ones but having to pay inheritance tax (IHT) could reduce the amount of your estate that they receive.

How can a trust help me reduce an inheritance tax bill?

If you put something in a trust, it no longer belongs to you if specific conditions are met. This implies that when you die, their value isn’t usually taken into account when calculating your Inheritance Tax bill.

Instead, the trust owns the money, investments, and property. In other words, when property is held in trust, it is not included in anyone’s estate for the purposes of Inheritance Tax.

Find out how we can help you with estate planning advice here.

Inheritance tax planning with a trust

Inheritance tax planning with a trust can be a complicated matter and must be carefully considered and advised with a view taken to your overall financial position and goals.

Here’s a brief overview of trusts and inheritance tax

When is inheritance tax due?

When someone dies, Inheritance Tax may be due on their estate (money and possessions).

Above the threshold, inheritance tax is 40%, however it is reduced to 36% if more than 10% of the estate is left to charity.

What is a trust?

A trust is a legal arrangement where you give investments, property or money to another person (Trustee) for the benefit of a third party (Beneficiary).

The trustee has the same powers as someone that owns the assets and have the power to buy/sell, manage the trust as they see fit. The beneficiary is the person who should benefit from the assets held.

What sort of trusts are there?

There are many different types of trust and some will still incur an Inheritance tax liability. 

Type of Trust How it works Possibility of Inheritance Tax liability
Bare trusts A trustee holds assets in a bare trust. If the beneficiary is 18 (in England and Wales) or 16 (in Scotland), they can take all of the trust’s capital and income at any time . That is, the settlor’s assets will always go to the chosen beneficiary. Trustees manage assets until the beneficiary is old enough to receive them. Transfers into a bare trust may also be exempt from Inheritance Tax, as long as the person making the transfer survives for 7 years after making the transfer.
Interest in possession trusts In these trusts, the trustee must distribute all trust income to the beneficiary (less any expenses).

On assets transferred into this type of trust before 22 March 2006, there’s no Inheritance Tax to pay.

On assets transferred on or after 22 March 2006, the 10-yearly Inheritance Tax charge may be due.

Discretionary trusts

Trustees can use these to decide how to use trust income and capital.

Depending on the trust deed, trustees may choose:

what is paid (income or capital)

which beneficiary to pay

payment frequency

impose requirements on beneficiaries

With these trusts all income received by beneficiaries is treated as though it has already been taxed at 45%
Accumulation trusts Trustees can use this to acquire income and add it to the trust’s capital. Like discretionary trusts, they may be able to provide income. With these trusts all income received by beneficiaries is treated as though it has already been taxed at 45%
Mixed trusts These are a mix of trusts. The trust is divided into parts that are taxed separately. See note: 1
Will Trusts Someone may request that all or part of their assets be placed in a trust. This is referred to as a ‘will trust.’ The personal representative of the deceased person must ensure that the trust is correctly set up and that all taxes have been paid, and the trustees must ensure that any future charges are subject to Inheritance Tax.
Settlor-interested trusts

This is where the trust benefits the settlor, their spouse, or their civil partner. It’s possible that the trust is:

a trust with a possession interest

a discretionary trust

an accumulation trust

See note: 1
Bereavement trust A bereaved trust is for a minor who has lost one or both parents (or step parent).

There a trust is set up for a bereaved minor, there are no Inheritance Tax charges if:

The assets in the trust are set aside just for bereaved minor

They become fully entitled to the assets by the age of 18

Non-resident trusts This is a trust where the trustees are not resident in the UK for tax purposes. See note: 1

Notes 1: A deceased person’s estate must be valued by determining whether they made any transfers in the 7 years before to death. If they did and paid 20% Inheritance Tax, you’ll have to pay 20% more from the estate.

Note 2: There’s no 10-yearly charge or exit charge on this type of trust as long as the asset stays in the trust and remains the ‘interest’ of the beneficiary.

Can I stop being an attorney?

Yes, you can stop acting as attorney at any time. If it’s before the LPA is registered you should tell the donor using form LPA005. 

If the LPA has been registered you will need to complete form LPA005, Disclaiming Your Appointment and send it to the Office of Public Guradian as well as the donor

Can the registered LPA be cancelled or revoked?

Yes, if the donor still has the mental capacity to do so, they can revoke the LPA. They will have to tell the attorney and the Office of Public Guardian of the revocations so that the LPA can be removed from the register.

In addition to that the Office of Public Guardian can cancel the registration on factual grounds, such as bankruptcy and the Court of Protection can also terminate the LPA, where the attorney is not carrying out the duties in the right way.

What’s the difference between Lasting Power of Attorney, Enduring Power of Attorney and Ordinary Power of Attorney?

The main differences between ordinary power of attorney, lasting power of authority and enduring power of attorney is:

Ordinary Power of Attorney Lasting Power of Authority Enduring Power of Attorney
What it covers covers decisions about your financial affairs Gives cover on ‘Health and welfare’ as well as Property and Financial.

Gives cover on only Property and Financial. 

Can be used if it was signed prior to 1 October 2007

Comes into effect Valid whilst you have mental capacity When you lose mental capacity or no longer want to make decisions for yourself When you lose mental capacity or no longer want to make decisions for yourself
Protection Short term cover – For a hospital stay, or if you just having difficulties and you want someone to be able to act on your behalf Long term cover for the future and can make life changing choices for the donor Long term future cover.
Begins Only when it is registered with the Office of Public Guardian

Only when it is registered with the Office of Public Guardian

The LPA holder no longer has to apply to the court when the person conferring the power is no longer mentally capable. 

The LPA is now only registrable with the Office of the Public Guardian

When it is signed. 

The EPA only requires registration when the person giving the power loses capacity

Ends When the donor  become mentally incapacitated

When the donor dies

If you become bankrupt

If you voluntarily revoke attorneyship


How long does a durable Power Of Attorney last?

Durable Power of Attorney is designed to cover unforeseen circumstance, like becoming unconscious and being on life support after an accident. It allows the donor to act immediately in your financial best interest as opposed to a family member going to court first. 

Typically once you’ve recovered from being incapacitated, a durable power of attorney would come to an end. 

How long does a general Power Of Attorney last?

A General Power of Attorney automatically ends if you become incapable of making the decisions that are conferred by the Power.

Making a lasting power of attorney

If you’re considering making a lasting power of attorney Joslin Rhodes can help advise and make sure that you have the cover you’re looking for. 

How to set up a Trust fund for inheritance tax

It always best to speak to an independent financial advisor when considering a trust fund. By taking a holistic approach to your financial situation as a whole, now and in the future they will be able to advise on the best course of action. 

If you were thinking about doing it yourself, there are some basic steps you can follow.

  1. Assets that will be put into the trust must be detailed. You’ll save time by having a detailed list of all of your assets and their values.
  2. Decide which people you want to be trustees. In general, you should be looking for people who are honest and sensible, who you can trust to act in the best interest of the beneficiaries, who know a lot about money, and who should be able to outlive you. It’s up to you to choose the right trustee. A good number of trustees is 2-4. If you want to set up a trust in your will, you can also name “reserve trustees.”
  3. Decide who will get the money. It’s also important to think about how much money or assets each person will get when you die.
  4. When you meet with your lawyer, you’ll work out the specifics, but you can start thinking about your long-term goals for the trust right away.

You’ll want to think about things like: what are my goals? How should the beneficiaries get money from the trust? You’ll need to think about how the trust can be managed and how could it be terminated?

How much does it cost to set up a trust fund UK?

As the trust needs to be legally-binding, precise, and clearly laid out, you should ask a solicitor to set it up for you so that it is done right. Costs to set up a trust can run about £1,000. People hire a solicitor to make sure the words are correct and there isn’t any ambiguity, which could end up costing them a lot of money down the road.

If I can do it myself and I only need a solicitor what can Joslin Rhodes do to help?

Estate planning is something we’ve specialised in for over 20 years. We give the best advice by taking the time to truly understand what you’re trying to achieve and why. 

One example, a couple wanted to put their home into trust for their three children. After speaking to one of our advisors they established that their children were grown up with lives of their own, and being practical, none of the children would get any practical use out of the house as they have lives and families of their own. 

It’s common for parents to want to leave a legacy and something for loved ones, and that’s just one example in many, but making sure you’re doing the right thing for you and your family is what matters to you, and matters to us. 

The technical bit, getting all the relevant will’s and trusts in place is easy enough. We, like you, want to make sure you and your family are taken care of in the best way possible. 

Don’t take our word for it…

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