personal finance

Inheritance Tax: What does leaving assets 'in trust' mean? Is Inheritance Tax payable?


Inheritance tax is a tax payable on the estate – which means the property, money, and possessions – of a person who has died. The standard Inheritance Tax rate is 40 per cent. It is charged on part of an estate which is above the Inheritance Tax threshold. This is £325,000, although there are some instances in which it may not be required to be paid.

This includes leaving everything above the threshold to a spouse, civil partner, a charity, or a community amateur sports club.

Additionally, it’s possible to increase the threshold to £475,000, if an individual gives their home to their children or grandchildren.

People who are married or in a civil partnership, and whose estate is worth less than the threshold, may transfer the unused threshold to their partner’s when they died.

This means the partner’s threshold could then be as much as £950,000.

When considering finances for the future, a person may choose to set up a trust.

This involves three parties, as Richard Bull, Partner in the Private Clients team at national audit, tax and advisory firm, Crowe, explains.

He told Express.co.uk: “A Trust is a relationship between three parties – the settlor who contributes the assets, the Trustees who manage those assets and the beneficiaries who will, in due course, benefit from the assets.

“In essence, it is the custodianship over family assets for the benefit of other individuals.

“A Trust can be set up during a person’s lifetime, or following an individual’s death via a will.

“When written into a will, a Trust can be used to defer the question over who should take what from the estate – effectively shifting the decision to the Trustees, which can be ideal when planning for future generations.”

So why might a person opt for a trust? Mr Bull shared some insight.

Addressing one reason, he explained: “Passing on wealth directly means that there is no control over what the recipient may do with it.

“So, for example, while grandparents may want their grandchildren to use the funds to pay for higher education or to get on the property ladder, a direct gift could just as easily be spent on a holiday to Vegas, should the beneficiary choose to do so.

“Using a Trust allows the value to be passed on, but remain subject to ongoing oversight by the Trustees.

“While Trustees often have overriding discretion, they are there to protect the beneficiaries from themselves, as much as outside influences, and see that the settlors wishes are carried out.”

Another circumstance may be when there is a business interest in the family, in which only one child is involved.

Mr Bull pointed out: “Instead of facing difficult decisions about splitting up the company, or equalising value from elsewhere, the business could be left to all children via a family Trust.

“This enables all children to benefit from the capital, should the business be sold in the future, but be designed so this does not necessarily happen in equal shares.”

So what happens in terms of Inheritance Tax when it comes to a trust?

The government website states that Inheritance Tax is due in four main situations.

This includes when assets are transferred into a trust, when a trust reaches a 10-year anniversary of it being set up, when assets are transferred out of a trust, as well as when someone dies and a trust is involved when sorting out their estate.

“You pay Inheritance Tax on ‘relevant property’ – assets like money, shares, houses or land. This includes the assets in most trusts,” gov.uk confirm.

Katriona McEwan, Tax Director at top 15 accountancy firm MHA MacIntyre Hudson, explained that any potential Inheritance Tax benefits are not usually the primary motive.

“When using a trust to make a gift on an asset the potential Inheritance Tax benefits are normally a secondary factor,” she told Express.co.uk.

“Trusts are generally used for asset protection and flexibility because, with an outright gift, control of the asset gifted is lost, which can be a problem if the gift recipient is a minor, or in the event of a divorce or bankruptcy.”

“If one of the desired effects is that the transfer of assets from the settlor to the trustees is to take those assets outside of the settlor’s estate for Inheritance Tax purposes, the settlor can not benefit from the trust assets (whether income or capital) and would typically be excluded from being a beneficiary.

“Ultimate control then rests with the trustees although the settlor will select the trustees and beneficiaries of the trust and can set out in a Letter of Wishes how and when those beneficiaries should benefit from the trust fund.

“From an Inheritance Tax perspective, provided the settlor survives for a period of seven years from the date of the transfer of assets to the trustees, the value of the trust assets will be outside of the settlor’s estate for IHT death tax purposes unless the settlor or the settlor’s spouse is named as one of the beneficiaries of the trust.”

Inheritance Tax may be payable by Trustees during the life of the trust, Ms McEwan explained.

This may be as follows:

  • Entry charge: “The entry charge arises when assets are given to the trust,” she said. “This charge is 20% of any gift above the available nil rate band (NRB) for the tax year of transfer. The NRB is currently £325,000.”
  • Principle charge: “The principle charge arises on every ten-year anniversary of the creation of the trust,” Ms McEwan commented. “The trust fund (including any payments made from it) is valued, and any sum in excess of the available NRB is taxed at a maximum rate of 6 per cent.”
  • Exit charge: “The exit charge arises when capital is distributed to beneficiaries,” the tax director said. “This charge arises on any distribution of trust assets between each ten-year anniversary and is based on a number of factors including the value of the assets being distributed. The maximum rate of tax is 5.85 per cent on the value in excess of the available NRB.”

In addition to these ongoing Inheritance Tax charges, trustees are liable to Income Tax and Capital Gains Tax on income that’s received and chargeable gains made by the trust.

READ MORE: Inheritance tax threshold 2019: What is current threshold in UK? How to get reduced rate



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