How trusts can help with your inheritance tax planning

When someone writes their will, they want to ensure they leave everything they want to their loved ones without inheritance tax (IHT) getting in the way. 

The solution is to become familiar with IHT planning. We looked at that in a previous blog post, but wanted to return to the topic to expand on a very important point we brought up: trusts. 

In this article, we’ll explain how you can benefit from trusts by incorporating them into your estate planning.


What is a trust?

A trust is a legal arrangement in which you, the settlor, hand money, property or investments to a trustee who is obliged to look after them and manage them responsibly. 

Depending on the details of the trust, the assets will be released to a third party before or after your death. This person, known as the beneficiary, is the one you want your assets to ultimately be passed on to.


What types of trusts are there?

As the settlor, you get to decide exactly how the trust will work. There are multiple types to pick from. 

First, there is the bare trust, which is the most straightforward type of trust. Under this arrangement, everything you put into the trust is held by the trustee on behalf of the beneficiary and the trustee acts in accordance with the beneficiary’s wishes.  

There are also interest-in-possession trusts, which may entitle beneficiaries to the income of a trust, but not the assets that generate that income. Income tax is due on money withdrawn from this type of trust. 

Another useful structure is the discretionary trust, which gives the trustee ultimate control over how assets are distributed between the beneficiaries. This is a popular option among the older generation who want to leave behind something for their grandchildren.  

Finally, there are mixed trusts that combine elements of other trust structures available.


How are trusts taxed?

Once you have put money, property or investments into a trust, you cannot usually touch them, so you need to be certain about your decision. However, this option does allow you to breathe easier in the knowledge that the assets you put inside are in the safe hands of your appointed trustee – this might be a friend or family member who you trust, or an experienced professional. 

But arguably the most important aspect of trusts is how they work with IHT.

After a period of time, assets that you put in a trust may no longer be considered to be your property, and therefore do not form part of your estate. 

However, it’s something of a misconception that trust assets are not taxed at all when the settlor passes away. Instead, there may be a tax charge when the assets leave the trust. 

There may also be a 6% tax charged every 10 years on the value of the assets in case a trust’s investments have grown in that time. 

Please note that the taxation of trusts is complex and the exact tax treatment depends on the type of trust you open. Always speak to a finance professional to fully understand your tax position.


Do you need help with your estate planning?

Estate planning is no walk in the park, but that’s where we come in. Let us help you with your estate planning, including tailored advice on the application of trusts. Let’s handle it together. 

Get in touch with us to talk about your inheritance plans.

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