With the latest changes to Inheritance Tax (IHT) on pensions announced in the UK Autumn Budget 2024, estate planning strategies including gifting assets and the use of trusts are more relevant than ever.
From 2027, pensions will be included in an estate’s value for IHT, removing the previous tax-free advantage of passing unused pension funds to heirs. Additionally, the freeze on IHT thresholds until 2030 means that more estates will fall into the taxable bracket, intensifying the need for proactive planning.
The changes also introduce reforms to Business Property Relief (BPR) and Agricultural Property Relief (APR), which have traditionally offered significant IHT benefits for family businesses, AIM shares and farms. These assets, previously sheltered from IHT, are due to face new restrictions. This requires individuals to revisit their strategies for protecting these assets.
This shift in rules underscores the critical role of trusts in safeguarding wealth, enabling individuals to shield assets from IHT within the new legislative framework.
Utilising trusts strategically can help mitigate tax burdens, ensuring assets pass to intended beneficiaries more efficiently and in line with personal wishes amidst changing tax regulations.
Trusts are however not for everyone, there are some simpler strategies such as outright gifting or just spending the money that may be more suitable. However, for some, they are a key part to an overall estate planning plan – allowing you to pass on a legacy, whilst retaining an element of control over who ultimately benefits from the assets.
What is a trust?
Trusts can be a powerful tool for passing wealth to future generations in a tax efficient way. Simply put, a trust is a legal method of protecting and managing your assets. When setting up a trust you can choose which of your assets are held in it; typically these include property, cash or investments. You then appoint a set of trustees, who are able to access your trust under certain conditions, manage the responsibilities of your estate plans and pass on assets or income to your beneficiaries.
What does a trust do?
Trusts can be used for lots of different situations but can be very useful when planning who you want to inherit your wealth and assets. Generally, they’re a beneficial tax planning tool, helping to keep things as simple as possible when it comes to managing assets during your lifetime and administering your estate after your death. As a result they can be a powerful means of helping to reduce inheritance tax.
When setting up a trust, you’ll need to appoint a set of trustees who are in charge of running it and who act on your behalf. As well as looking after general duties, trustees are also responsible for any reporting to HMRC, the UK tax authorities.
There are lots of reasons why you might choose to set up a trust, including:
- To protect your wealth
- To reduce Inheritance Tax
- To provide for beneficiaries who are too young to inherit
- To give detailed instructions for how you want your estate to be shared by your beneficiaries
Trusts for succession & Inheritance Tax planning
There are a range of different trusts which can be used to help you with succession and Inheritance Tax planning:
Discretionary Trusts – one of the most common trusts, and a very flexible option which allows your trustees to share income and capital with beneficiaries. A good example of a discretionary trust is when parents want to provide for their children and future descendants. Payments can be made for education, health reasons, to fund business initiatives or to help buy property. Depending on your wealth, this type of trust can often provide for multiple generations of descendants.
Interest in Possession Trusts – also known as life interest trusts, these tools allow the income of the trust, after expenses, to be paid out to a nominated beneficiary or beneficiaries. They’re often used to provide for a spouse for the rest of their lifetime, with assets then passing to children after the spouse’s death.
Offshore Trusts – these trusts may sit outside the scope of UK tax and need to have at least one trustee overseas. Offshore trusts tend to be used for those with foreign assets, including property, and are often used by those coming to the UK who still have assets overseas. The legislation around these types of trusts is highly complex, and professional advice is always recommended.
Bare Trusts – this is the simplest form of trust, involving just a nominee agreement where a trustee holds property on behalf of a beneficiary. The beneficiary becomes entitled to property and income as soon as they are over 18 (16 in Scotland).
Using a trust to pass on assets
Choosing to use a trust to pass on your assets can offer you significant peace of mind as well as reducing your Inheritance Tax bill. By moving your assets into a trust you may be able to effectively transfer them out of your estate and into a figurative ‘safe’ so that they can be protected for those who you want to inherit.
Administration of trusts
Those administering trusts have a certain set of responsibilities, to help manage the assets properly and protect them on behalf of any beneficiaries. Some of the tasks which trustees are expected to perform include:
- Holding regular meetings and keeping records of discussions
- Reviewing the trust
- Maintaining a set of accounts to show assets, expenses and distributions of income
- Providing beneficiaries with information
- Reporting to HMRC as necessary
Do I need to pay Inheritance Tax on a trust?
Many people believe that setting up a trust automatically removes the opportunity for Inheritance Tax to be charged. This isn’t the case, and generally a 20% charge is due when setting up any trust with assets which are more than the current nil-rate band. Exceptions apply, and ultimately the way trusts are taxed depends on the type of trust it is.
How much Inheritance Tax would I have to pay on a Discretionary Trust?
When considering a Discretionary Trust the usual Inheritance Tax charges which apply are:
- Setting up the trust– a 20% Inheritance Tax bill may be created when setting the trust up. The amount which has to be paid is worked out by calculating the value of the assets not covered by your unused Inheritance Tax nil rate band allowance.
- 10 year anniversary– any assets are re-assessed each decade and generally a 6% charge is taxed on the value of the total assets (after the allowance).
- Exiting the trust– Inheritance Tax is paid again when the trust closes, or if assets are removed. The amount to pay is worked out from the most recent 10 year anniversary valuation, up to 6%, charged pro-rata.
Does the IHT rate change by the type of trust?
Trusts can help to reduce or even wipe out completely a 40% Inheritance Tax charge. The type of trust you use will depend on your own personal and family circumstances.
Trust advice & succession planning from Progeny
We’ve helped many families with their succession plans. When setting up a trust, it’s important that your personal circumstances are carefully reviewed so that the right plans can be put in place. We can discuss your wishes for how you’d like your estate to pass on, and support you through the process of setting up a trust. Please contact your nearest office to discuss any aspect of your estate plans.
Important Note
The information contained within this document is subject to the UK regulatory regime and is therefore primarily targeted at consumers based in the UK.
This article is distributed for educational purposes and should not be considered investment advice or an offer of any security for sale.
This article contains the opinions of the author but not necessarily the Firm and does not represent a recommendation of any particular security, strategy or investment product.
Information contained herein has been obtained from sources believed to be reliable but is not guaranteed.
If you are unsure about the suitability of otherwise of any product or service, we recommend that you seek professional advice.
Tax treatment depends upon individual circumstances and is based on current UK tax legislation, that is subject to change at any time.
The Financial Conduct Authority does not regulate will writing and some forms of estate planning.
