Wills, Trusts and Inheritance Tax Planning

In a previous post we looked at some of the trusts that can potentially be used for Inheritance Tax (IHT) planning, in this blog we discuss a number of further options that could potentially be used when planning your affairs.

It's important to note that IHT rates and regulations can change, indeed there has been some speculation in recent months that the current government may abolish IHT completely, however as of 1st October 2023 the current provisions still apply.

In any case it is always prudent to seek advice from a qualified professional who is knowledgeable about the most up-to-date rules and can provide guidance tailored to your specific situation.

Trusts to consider when planning your Inheritance Tax

  1. Nil-Rate Band Discretionary Trust: This type of trust is designed to make use of the nil-rate band allowance, which allows a certain amount of your estate to be passed on tax-free. Any assets placed into this trust will not be counted as part of your estate for IHT purposes, and they can be distributed to beneficiaries according to the discretion of the trustees.
  2. Gift and Loan Trust: With this trust, you make a gift to the trust, and the trust lends the same amount back to you. The loan can be repaid from your estate, potentially reducing the value of your taxable estate at the time of your death. This type of trust can be particularly useful if you want to retain access to the gifted assets.
  3. Discounted Gift Trust: This trust involves making a gift to the trust while retaining the right to receive a regular income from it. Because you've given up some control and access to the assets, the value of the gift for IHT purposes is reduced, potentially leading to lower IHT liabilities.
  4. Family Investment Company (FIC): An FIC is not a trust, but it's a common vehicle for wealth preservation and IHT planning. It involves setting up a company owned by family members, and shares in the company can be gifted or sold over time, allowing for efficient wealth transfer. Careful planning is necessary to ensure compliance with tax regulations.
  5. Bare Trusts: These trusts are very simple and typically used for minors or vulnerable beneficiaries. The assets held in a bare trust are treated as owned by the beneficiary, so they are subject to IHT if your estate exceeds the threshold. However, they can be useful for gifting assets to minors while retaining some control until they reach a certain age.
  6. Life Insurance Trust: This trust is often used to cover the potential IHT liability on your estate. You place a life insurance policy within the trust, and the pay-out from the policy can be used to pay the IHT bill, ensuring that your beneficiaries receive the full value of your estate.
  7. Charitable Remainder Trust: By placing assets in this trust, you can provide an income to yourself or a beneficiary for a specified period, after which the remaining assets are donated to a charity. This can reduce the taxable value of your estate and also benefit a charitable cause.

What does HMRC make of the use of Trusts?

HMRC's view on the use of trusts for tax planning and estate planning purposes is that they are legal structures, and individuals and families are allowed to use trusts to manage their assets, plan for the future, and potentially reduce their tax liabilities, including Inheritance Tax (IHT). However, HMRC closely monitors and regulates the use of trusts to ensure that they are not used for tax evasion or other unlawful purposes.

The use of trusts should always comply with the legal requirements and should not be used solely for tax avoidance purposes. HMRC may challenge arrangements they deem to be tax avoidance or evasion, and penalties may apply if the tax authority determines that a trust has been used improperly. Consulting with a tax professional ensures that your trust arrangements are structured in a legally compliant and tax-efficient manner.

Always ask for professional advice

It is important to reiterate that advice from a qualified professional who specializes in estate planning and tax matters should be an essential step when considering setting up a trust. They can help you navigate the complexities of IHT planning and ensure that your Will is structured in the most tax-efficient manner based on the current provisions and your individual circumstances.

As your first stop the professionals at Savigny Will Writers have years of experience dealing with complex Wills, trusts and estate planning. We can help guide you and advise who can provide expert advice if we cannot answer your questions. We'll always provide a sympathetic and understanding service and help you to write the Will that gives you peace of mind and optimises the benefits to your loved ones.

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