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Trust Planning


Trusts can form part of effective inheritance tax planning.

If you have surplus income and capital which you are unlikely to need yourself, you may consider a “gift” either outright or into a Trust.

An outright gift is known as a PET (Potentially Exempt Transfer) and a gift into a Trust can be either a PET or a CLT (Chargeable Lifetime Transfer), depending on the type of Trust. Both fall outside your estate after 7 years but a CLT has additional tax implications to consider.

Trusts

Trusts can appear complicated, so we recommend you contact an independent financial adviser for trust planning advice. Our Lonsdale wealth management financial advisers often work with your solicitor or accountant to ensure you receive joined-up legal, financial and tax advice.

Below we review the two most common types of Trust and consider how they could be used for financial planning.

Bare Trusts

One of the simplest forms of trust is a bare trust. Any assets are treated for tax purposes as though they are owned outright by the beneficiary, other than where parental settlement rules apply.

These are often used by grandparents to put money aside for their grandchildren as any investments can grow tax efficiently using the grandchild’s personal tax allowances.

Limitations of Bare Trusts

The beneficiary can demand access to the investments at age 18, when they become the outright owner. The gift into the Trust is classed as a PET unless fully or partially covered by an exemption such as the £3,000 per annum gift exemption.

Discretionary Trusts

This is a frequently used trust because of the flexibility it offers. All the beneficiaries are classed as “potential” beneficiaries, as they can be varied at any time. As they are “potential”, the Trust assets belong to the Trust and not the beneficiaries, so this can provide protection against family break-up, benefits and care home fees.

Any payment into the Trust is a CLT, which means there is an initial tax charge if the payments exceed the Nil-Rate Band at the time.

Limitations of Discretionary Trusts

The Trust income is generally taxed at the highest rate of tax of 45% interest and 38.1% for dividends. However, a standard rate band of £1,000 is also available which is divided between the number of trusts created by the same settlor (minimum of £200) and is subject to the basic rates of tax (7.5% for dividends and 20% for other income). There can also be a periodic 10-year tax charge or exit charge on the value of the Trust assets if they exceed the Nil-Rate Band at that time.

Other Trusts

There are many variations to these two common trusts. Absolute Trusts for sums which exceed £650,000 and Loan Trusts & Discounted Gift Trusts (DGTs) which can provide the settlor with an income during their lifetime.

For more general estate planning advice review our Inheritance Tax Introductory Guide.

Trust Planning checklist

  • Who are your estate beneficiaries?
  • Have you valued your financial assets?
  • Would you consider giving gift allowances in your lifetime?
  • Do you have surplus income?
  • Could you afford to give up access to some of your capital?
  • What type of Trust would be most suitable for your beneficiaries?

The Financial Conduct Authority does not regulate inheritance tax planning or tax advice.

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