Inheritance Tax (IHT) is a tax that is levied on the estate of a deceased person before it is passed on to their beneficiaries The current IHT threshold in the UK is £325,000, and anything above this amount is subject to a 40% tax rate This can significantly reduce the amount of wealth passed on to loved ones, which is why many people look for ways to minimize their IHT liability.
One effective strategy to reduce or even eliminate IHT is to create trusts Trusts are legal arrangements where a person (the settlor) transfers assets to a trustee, who then manages those assets for the benefit of the beneficiaries By placing assets in a trust, the settlor removes them from their estate, reducing the IHT liability.
There are various types of trusts that can be used to avoid IHT, each with its own rules and benefits Let’s take a look at some of the most popular trusts used for this purpose:
1 Bare Trusts
Also known as a simple trust, a bare trust is the simplest form of trust arrangement In a bare trust, the trustee holds the assets on behalf of the beneficiary, who has an absolute right to receive both the income and capital of the trust Since the beneficiary is entitled to the assets in the trust, they are considered the legal owner for tax purposes This means that the assets held in a bare trust are not subject to IHT, as they are no longer part of the settlor’s estate.
2 Discretionary Trusts
In a discretionary trust, the trustee has discretion over how the trust’s income and capital should be distributed among the beneficiaries This type of trust offers more flexibility and control compared to a bare trust By choosing not to distribute the assets immediately, the settlor can avoid IHT on the trust assets, as they are held separately from their estate.
3 Interest in Possession Trusts
An interest in possession trust gives a beneficiary the right to receive the income generated by the trust assets trusts to avoid iht. The beneficiary does not have access to the trust capital, which remains under the control of the trustee This type of trust can be used to reduce IHT, as the assets held in the trust are not considered part of the beneficiary’s estate.
4 Pilot Trusts
A pilot trust is a type of trust that is set up to receive assets from multiple settlors By creating a pilot trust, settlors can pool their resources to take advantage of multiple IHT exemptions This can be particularly useful for spouses or civil partners who want to maximize their IHT allowances.
5 Family Investment Companies
Family investment companies (FICs) are another effective way to reduce IHT liability In an FIC, the family sets up a company to hold and manage their assets Shares in the company can be gifted to family members, allowing for the transfer of wealth without triggering IHT By using a company structure, families can also benefit from lower tax rates on investment income.
It is important to note that the effectiveness of these trusts in avoiding IHT will depend on various factors, including the value of the assets transferred, the timing of the transfer, and the specific rules governing each type of trust It is essential to seek professional advice before setting up a trust to ensure that it is structured correctly and meets your specific needs.
In conclusion, trusts can be a powerful tool for reducing IHT liability and ensuring that more of your wealth passes on to your loved ones By using trusts strategically, you can protect your assets from excessive taxation and secure a more prosperous future for your family If you are concerned about the impact of IHT on your estate, consider speaking to a financial advisor or estate planning specialist to explore the options available to you Trusts are a valuable tool that, when used wisely, can help you preserve your legacy for generations to come.