April 2024
Inheritance Tax Planning Trust in April 2024
Inheritance tax planning is an important part of estate management. By putting your money and property into a trust, you can maximize your tax-free allowance and reduce the amount of inheritance tax you have to pay. This increases the legacy you can pass onto future generations, as less of your wealth will end up in the hands of HMRC.
Topics that you will find covered on this page
You can listen to an audio recording of this page below.
What are trusts?
A trust is a legal tool where you give your cash or assets to one person (the trustee) to hold on behalf of another person (the beneficiary).
When you put your possessions into a trust, technically they do not belong to you anymore, but rather they belong to the trust.
Here is a short video on what an inheritance tax trust is.
Can you set up a trust to avoid inheritance tax?
If your money or property is in a trust, it will not form part of your estate anymore, so it will not be considered when your inheritance tax bill is worked out. Further, there may be different tax rates on different types of trust.
Which type of trusts are available?
There are several types of trust to consider, which have different systems of ownership and tax implications. You should use a solicitor or financial adviser for guidance on which type of trust is suited to your finances.
Bare Trust
The beneficiary has the whole right to the capital and the property held in the trust, plus any income the trust makes. The trustees do not have discretion on when heirs get payment.
Discretionary Trust
The trustees get discretion on how to distribute the assets and the funds in the trust. The trustees can make investment decisions that they think are in the best interest of the beneficiary.
This is a good idea if you want to leave a trust to grandchildren, but want their parents to get to decide how shares of the money should be given to them, such as when they go to university.
Interest in Possession Trust
The beneficiary has a right to the income as it is generated, but doesn’t have a right to the assets in the trust until a later point.
This is commonly used by spouses or civil partners, so your partner can live in the house until they die, at which point the children get the house. This is useful as if your spouse has remarried, your children could have been left out of the will deed and not inherited.
Discounted Gift Trusts
These are used to hold insurance bonds, so you can get a 5% income from the investment bond every year. This money will go to your beneficiaries when you die.
Loan Trusts
A loan trust is where you can access the capital in the trust at any point, but the growth is not considered part of your estate. You have to make an interest-free loan to your trustees so they can make an investment.
The loan is repayable at any point.
Trusts For a Vulnerable Person
Only the vulnerable person benefits from the assets, often a person with a disability.
- Non-Resident trust. This is used to reduce tax when all the beneficiaries live abroad.
- Mixed Trust. Where you pick and choose different elements from different types of trust.
How do I make a trust?
You can make a trust during your lifetime or in your will. You will need legal help and advice to draft your trust.
What is the nil-rate band?
This is the threshold up to which your estate is tax-free. The rates are as follows:
- £325,000 for an individual
- Unused nil-rate band can be transferred to your spouse or civil partner, so the total threshold can be up to £650,000 for couples
- There is an additional nil rate band of £175,000 when passing on your family home to your direct descendants
- Tapered withdrawal for estates worth over £2 million, where the tax due is reduced by £1 for every £2 over the threshold
"You can avoid IHT by gradually transferring assets into the trust. If you live longer than seven years, you will not have to pay IHT on these trust assets at the same rate as you would if they were part of your estate."
Do you have to pay inheritance tax on a trust?
Trust funds often have their own tax treatment, different to normalinheritance tax liability. This means you do not have to pay IHT on the trust investments on your death.
However, you should be careful, as the trust IHT regime may negatively affect you, plus you may have to pay more income tax or capital gains tax (CGT) on the trust fund. Hence, legal advice is important.
How can I avoid inheritance tax using a trust?
You can avoid IHT by gradually transferring assets into the trust. If you live longer than seven years, you will not have to pay IHT on these trust assets at the same rate as you would if they were part of your estate.
In addition, if you do pass away within seven years, you may also benefit from taper relief, meaning you still pay inheritance tax on your investments but at a lower rate.
What is taper relief?
If you made a gift into a trust within seven years of dying, the rate of tax on inheritance UK will be reduced on a sliding scale. This is known astaper relief. The IHT rate compared to the number of years between the transfer and your death is given below:
Over 7 years- 0%
6-7 years- 8%
5-6 years- 16%
4-5 years- 24%
3-4 years- 32%
0-3 years- 40%
What is a gift with reservation?
A gift with reservation is where you put an asset into a trust but still get a benefit from it, like where you gift property but keep living in it rent-free, or premiums into a life insurance policy.
This may be considered as part of your estate and therefore inheritance tax is payable if the benefit continues until your death.
When do you need to pay inheritance tax on a trust?
There are four main times you may have to pay inheritance tax on property in a trust:
- When you put the property into the trust
- On the trusts ten year anniversary, and every ten years after that
- When you take the assets out of the trust, i.e. the exit charge
- When the trust forms part of an estate involved in the probate process,
How much inheritance tax do I have to pay on a discretionary trust?
The most common trust fund used as part of estate planning is a discretionary trust. The tax charge is as follows-
- 20% IHT when you set up the trust on the value of the trust above your personal allowance, likely £325,000.
- 6% on every 10 year anniversary
- Up to 6% exit charge, for when the trust is closed or if assets are taken out of the trust. This is based on the last 10-year charge valuation of the money in the trust, and on a pro-rata basis, so if a year has passed since the last valuation, you will pay 0.6%.
How does my personal allowance work in relation to trusts?
The inheritance tax bill applies to all the assets in the trust, minus any of your personal allowance you have not used in the previous seven years. This equation will take into account if you have multiple trusts.
What is the 10-year charge on trusts?
The ten-year charge is where every ten years you have to pay tax. You have to pay tax on the value of the property and assets in the trust fund on the day prior to the anniversary.
You work out the net value by counting up all the inheritance tax property in the trust, and taking away any special reliefs or debts.
What is the 10 year IHT charge discretionary trusts?
The current tax to pay on a discretionary trust at its ten year anniversary is 6% on the value over the IHT allowance.
Do I have to pay the 10-year charge on a trust I have inherited?
If you inherit an interest in possession trust, you do not have to pay the ten-year inheritance tax bill at the 10 year anniversary. You will be charged tax when you die instead, probably at a rate of 40%.
How does inheritance tax work for different types of trust?
The way different trusts are charged inheritance tax (IHT) varies.
Bare Trusts
This trust option may be exempt from property inheritance tax where the person who put the assets into the trust lives for over 7 years after the transfer.
Interest in Possession Trusts
If your assets were already in this kind of trust before the 22nd of March 2006, you do not have to pay tax. After this date, settlors may have to pay the taxman the 10-yearly tax bill. There are different rules and exemptions on transitional series interest.
Trust for a disabled beneficiary
You do not have to pay the ten-year charge on this if the asset is kept in the trust and is in the beneficiary’s interest. Also, you do not have to pay inheritance tax iht where the person who made the transfer lives at least 7 years after putting the assets on trust.
Trust for a bereaved minor
For this type of trust, there is no inheritance tax to pay if the assets are just for the bereaved minor and they become entitled to the assets at age 18. If the beneficiary is aged 18-25, then they must become entitled to the assets at age 25, and there will be an exit charge for transfers out of the trust.
How much does setting up a trust cost?
Typically the costs range from around £300 up to £1,000 depending on the complexity.
Therefore, something to consider is the balance of the cost of making a trust with any potential inheritance tax savings. You will have to pay for legal advice, and if you are using a professional trustee. There may be a fee for transfers in and out of the trust.
How can I get advice on setting up an inheritance tax planning trust?
To set up a trust, you should get advice from a solicitor or an accountant with expertise in inheritance tax. A good place to start STEPs list of advisers and companies that can offer advice:https://www.step.org/
What other ways can I reduce the inheritance tax charge?
It is worth doing research into other ways to reduce your tax liability, beyond inheritance tax trusts, as this can further reduce your tax liability:
- Use estate planning in your will, so intestacy rules do not apply. These rules may mean you pay more tax than you otherwise would have to.
- Maximise your inheritance tax threshold, including the residence nil-rate band
- Give your assets away to your children and grandchildren over seven years before you die. You can make gifts of £3000 tax-free each year of your life.
- Leave a gift to charity. The gift will be tax-free, and if you made a gift of 10% of your estate to charity, your inheritance tax rate on the rest of your wealth will go down to 36%.
- Get a life insurance polity that will cover the inheritance tax bill, and then put the policy in a trust.
- Equity release schemes, like a home revision scheme or lifetime mortgage. This will reduce the assets you own, so there will be more debts against your estate.
- Gifts of excess income can be tax-free, as long as they are part of normal expenditure, from your income and do not negatively affect your standard of living
- Take advantage of the rule where you can pass on your pension money without tax. Instead of using your retirement income, you can use your savings to live off during your retirement, you do not have to pay tax when you pass on your pension money.
Article author
Katy Davies
I am a keen reader and writer and have been helping to write and produce the legal content for the site since the launch. I studied for a law degree at Manchester University and I use that theoretical experience, as well as my practical experience as a solicitor, to help produce legal content which I hope you find helpful.
Outside of work, I love the snow and am a keen snowboarder. Most winters you will see me trying to get away for long weekends to the slopes in Switzerland or France.
Email – [email protected]
LinkedIn – Connect with me
Learn about different types of Trusts that could also help you
Property Protection Trusts
This is a trust you put in your will so that the surviving spouse can continue living in your property, but the deceased’s share of the property is kept separate.
Interest in Possession Trusts
This is a trust where the trustee must give all the trust income to a beneficiary as the income is generated, except for trust expenses.
Inheritance Tax Planning Trusts
By putting your money and property into a trust, you can maximize your tax-free allowance and reduce the amount of inheritance tax you pay.
Life Interest Trusts
A life interest trust is a trust written into a will. This means that the trustees hold the assets in the trust on behalf of the beneficiaries. Read more about them.
Asset Protection Trusts
The benefits can include reducing the care fees payable to the local authority and have tax advantages.
Home Protection Trusts
Protecting assets in a trust is a good option for wealth management and getting control over who inherits from your estate.
Inheritance Protection Trusts
The term ‘inheritance protection trust’ could describe many different types of beneficiary trusts. However, it usually refers to a trust for healthy, capable beneficiaries in a will.
Family Protection Trusts
A family protection trust is a method you can use to ring-fence your assets from taxation, care fees, and other risks to your estate.
Estate Planning & Trusts
Estate planning involves considering what to do with a person’s money and assets after they are deceased.
Frequently Asked Questions
What are trusts?
A trust is a legal tool where you give your cash or assets to one person (the trustee) to hold on behalf of another person (the beneficiary).
When you put your possessions into a trust, technically they do not belong to you anymore, but rather they belong to the trust.
Can you set up a trust to avoid inheritance tax?
If your money or property is in a trust, it will not form part of your estate anymore, so it will not be considered when your inheritance tax bill is worked out. Further, there may be different tax rates on different types of trust.
How do I make a trust?
You can make a trust during your lifetime or in your will. You will need legal help and advice to draft your trust.
Do you have to pay inheritance tax on a trust?
Trust funds often have their own tax treatment, different to normal inheritance tax liability. This means you do not have to pay IHT on the trust investments on your death.
However, you should be careful, as the trust IHT regime may negatively affect you, plus you may have to pay more income tax or capital gains tax (CGT) on the trust fund. Hence, legal advice is important.
