Interest has once again returned to trust structures and the nature of future tax planning; both once seen as practices utilised by the wealthy leading to criticism as a means for families to pass fortunes through generations by reduction of tax duties.
Following his death, the 6th Duke of Westminster was expected to leave an estimated £8.3 billion to his son Hugh Richard Louis. Alongside his title and inheritance however, a bill of £3 billion was also expected to be passed on if in keeping with usual inheritance tax rules, as covered previously here. Due to the nature of the trust framework established in the 1950s, the 25-year-old has avoided having to foot the bill – a sum not far from the entire death duty taken by the Government in the previous financial year.
With regards to trusts, rather than listed in the will as direct owners, successive generations are referred to as “trustees”, meaning assets do not become a part of the estate and are thus not liable for inheritance tax (IHT).
Over the “nil-rate band”, IHT is usually charged at 40% on directly-owned assets. £325,000 is the current threshold for an individual with £650,000 being for spouses or civil partners.
Although the avoidance of the IHT tax on the Duke’s estate was likely due to years of professional planning, such planning need not be reserved for those only with extreme wealth. Such trust structures could similarly be implemented for those with more moderate assets.
Not just for those seeking to utilise legal loopholes, Gary Smith, a financial adviser, explains that trusts form a legitimate element of financial planning. Mentioning that anyone can set one up, the Tilney financial adviser stated: ”Ordinary people will use them to place assets outside their estate for IHT purposes. If you have assets which exceed the £325,000 nil-rate band (or £650,000 for a couple), you can set up a trust to pass assets down the generations without IHT being incurred.”
There is no minimum amount required with the possibility of a trust effectively being set up for £1. It does however mean that the funds are effectively being given away and the money unable to be returned. Similarly, Chas Roy-Chowdry reminds those considering to set up a trust that the rules governing tax are likely to have drastically changed from the 1950s. Chowdry, from the Association of Chartered Certified Accountants, also mentioned that “the Government is coming down very hard on tax avoidance,” and to ensure individuals abide by the updated rules.
Trusts may also be utilised for various situations outside of death duty avoidance. This can include security of family member interest as acknowledged by Clive Gawthorpe of UHY Hacker Young. He highlights the use of trustees for the management of assets such as on behalf of a disabled child, who would otherwise be unable to do so.
Children can also be protected from previous marriages through nomination of a trustee. “If, for example, a man gets divorced and remarries a new partner, and the couple buy a home together, he might want to set up a trust to ensure the children from his first marriage get a share of the marital home once the spouse dies,” says Smith. “A trust is a way of ensuring that assets go to the correct beneficiaries.”
Similarly, appointing a trustee to manage assets can mean children are barred from accessing inheritance too soon; a function which may be appropriate if the beneficiary is below 18.
There are various types of trust available depending on the intended purpose and whom it is supposed to benefit. The most common is discretionary, widely used to alleviate the burden of IHT. Beneficiaries are named upon its creation and trustees are able to use their discretion when deciding who is to benefit, how much they receive and the age at which they do so. For an amount above the “nil-rate band”, there is an automatic IHT charge of 20%, but below this, no initial amount is due.
As well as the trustor having to live for seven years, a supplementary test every 10 years occurs at the anniversary of the trust’s creation. 6% of the trust’s value may at these points be awarded to HM Revenue & Customs.
Absolute or bare trusts however, cannot be altered. They are usually set up in the name of a child and this is the only individual that will benefit. No limit for the amount possible to be put in exists and no tax is immediately due, though there is a lack of control over how the trust’s value is ultimately used. Gary Smith highlights the possibility of a child spending the entire sum on a single purchase following their absolute entitlement to the trust, without any interference from the trustor.
For minimal or even no cost whatsoever, a trust can be set up if done so through a life office, according to Smith. However, this may differ if surrounding conditions are more complex when a solicitor is required. Similarly is use of professional trustees over familial ones, which Gawthorpe advises could be more expensive.
