How do trusts help when it comes to Inheritance Tax planning?

How do trusts help when it comes to Inheritance Tax planning?


How do trusts help when it comes to Inheritance Tax planning?

Setting up a trust can be a fantastic tool when it comes to planning your legacy.

When it comes to leaving a legacy for the people who are important to you, placing your assets in a trust can be a great way of ensuring that total isn’t hit by Inheritance Tax.

While there are a number of different purposes for a trust, today we’ll be focusing on trusts that enable you to pass on assets as a part of legacy that you intend to be inherited after you’re gone.

What is a trust?

A trust is a legal  arrangement where your money and assets are managed by someone else in order to benefit a person (or group of people) of your choice.

When you put your money, property, investments, or any other assets into a trust, they essentially no longer belong to you. As a consequence, in some cases, those assets will no longer be subject to Inheritance Tax (IHT).

It is an agreement between you, the person who will benefit from the money, and a third party who manages the assets in the meantime. These parties are otherwise known as:

  • The settlor – This is the person who’s placing their money or assets into the trust. In this case, this might be someone planning to leave a legacy to a loved one after they’ve died.
  • The beneficiary – This is the person who benefits from the trust and will receive the money or assets at a pre-determined time, such as upon the death of the settlor.
  • The trustee – This is the party who manages the trust on behalf of the settlor, and is often made up of a legal professional (like a lawyer) and a family member. They will not financially benefit from this relationship unless otherwise stated.

There are many different types of trusts, all with their own benefits and limitations. Some are more complicated than others and may require the expertise of a financial adviser to set up.

How does a trust help to reduce Inheritance Tax?

IHT is a type of tax that’s payable on the value of the estate of someone who has died, including all property, possessions and any money.

However, if you’ve placed any funds and assets into certain types of trust before you die, these assets will no longer be liable for IHT. This is because once you put your assets in a trust, provided certain conditions are met, you no longer own those assets.

If these conditions are met, the assets you place in trust may not count towards your Inheritance Tax bill when you die, meaning your beneficiaries will receive more of your intended legacy.

However, it’s worth noting that not every trust has this perk. The trusts that you’ll need to consider are ones that are subject to their own inheritance tax regimes, meaning the assets wouldn’t be likely to be liable for IHT.

These types of trust are not always straightforward and must meet certain requirements. Independent financial advisers like HWIFM can offer expert advice on choosing and establishing a trust that’s right for you.

Are there downsides to creating a trust?

There are many fantastic benefits to setting up a trust, but like all financial decisions, there are risks involved.

For many settlors, relinquishing control of the money and property you’ve worked hard to earn can feel uncomfortable. While some trusts allow you to recover your assets, many operate as a one-way system – once it’s out of your hands, it can’t be recovered.

While a settlor still has a say in what the trustees do with the assets, they tread a fine legal line. If the settlor is found to have too much involvement in the direct management of the trust, this could violate the terms of the trust.

The role of the trustee is also a big responsibility and can sometimes represent a decades-long commitment. Choosing the right trustee is a decision with a lot riding on it.

Despite these concerns, with the right advice and careful planning from the start, a trust can still be a safe and beneficial way of creating a legacy that needn’t be affected by IHT.

Do I need to consider setting up a trust?

Like every financial consideration, the final decision will likely depend on your individual circumstances.

If you’re starting to think about what you’d like to leave behind, and to whom, it’s a good idea to consider how Inheritance Tax might affect that legacy. 

For some people, the total value of their estates may not exceed £325,000, and therefore  won’t be liable for IHT. In that case, you may not wish to consider setting up a trust, as the tax won’t affect your assets.

However, if you begin calculating how much your estate is worth and find that IHT will indeed affect how much you can leave for your loved ones, a trust can become a powerful tool in your financial toolkit.

The bottom line is that setting up a trust is only a good decision when it’s the right one for you.

The team at HWIFM offer advice on guidance based on you and your own specific financial goals and priorities.

Speak to us today and let’s discover whether setting up a trust is the right decision for you.

 Please note that The Financial Conduct Authority does not regulate estate planning, tax advice, Wills or trusts.