How a Trust Could Help with Inheritance Tax

Some Will Writers recommend putting property into a trust in the belief that it will reduce the liability for Inheritance Tax (IHT) and prevent local authorities taxing the estate to recover care fees.

But will this work?

Inheritance Tax (IHT) is a tax on the estate (the property, money and possessions) of someone who has died.

No IHT is due where either the value of the estate is below the threshold of £325,000, or where everything above the £325,000 threshold is left to a spouse, civil partner, a charity or a community amateur sports club.

The standard IHT rate is 40% which is charged on the part of the estate that is above the threshold.

If you give away your home to your children (including adopted, foster or stepchildren) or grandchildren your threshold can increase to £500,000.

If you’re married or in a civil partnership and your estate is worth less than your threshold, any unused threshold can be added to your partner’s threshold when you die.

So can setting up a trust allow you to avoid paying IHT?

Types of trust

A trust is a legal arrangement where you gift cash, property or investments to someone else so they can look after them for the benefit of a third person. For example, you might give some of your savings to your children to hold on trust for your grandchildren until they turn 18.

There are several types of trust, and while setting up a basic trust might have minimal cost, others are more complex to set up and would need more specialist advice, which are more expensive.

These include bare trusts, interest in possession trusts, discretionary trusts, accumulation trusts, mixed trusts and non-resident trusts.

Trusts are often thought of as devices to avoid paying tax. In reality, you would almost never set up a trust just to gain tax advantages, because trusts are subject to three separate inheritance taxes: an entry charge; an exit charge; and a ten-year charge where a trust runs for over 10 years or multiples of 10 years. Be aware that fines are payable where a 10 year charge is not paid when due. Calculations for these charges are very complicated.

A trust can be a good way to cut the tax to be paid on your inheritance but you will  need professional advice to get it right. It is essential you speak with your solicitor or an independent financial adviser before embarking on this course of action.

Calls us at Powellslaw, on 01934 623 501 and talk to us about trusts.

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