Trusts have a reputation for being linked to unfair tax avoidance, but they can play a legitimate role in estate and inheritance tax planning. They can be especially worthwhile for business owners. Could a simple trust help preserve more of your estate for your family?
HMRC (mis)trust
HMRC is clear that it doesn’t like trusts. And, while naming no names, certain ill-informed politicians have said they exist solely as a means of tax avoidance. This is a daft viewpoint given that trusts have been around for 700 years longer than our tax system has been in existence. That said, trusts can be very useful tax planning tools especially for business owners with substantial estates.
IHT planning
The best way to demonstrate how a trust can be tax efficient is to consider the inheritance tax (IHT) position of a typical business owner who sets up a trust through their will and one that doesn’t.
To keep the calculations as simple as possible, for the examples below we’ve assumed that the estates do not include a property for which the residence nil rate band can apply.
Example 1 – no trust
Barry owns half the shares in a print firm called Acom Ltd. He has a wife, Jane, and two adult children. Barry died in March 2018 and leaves all his estate to Jane. She receives dividends for three years before selling the shares for £800,000 to Acom’s other shareholders. Jane doesn’t need all this extra cash and realises she must reduce the value of her estate to lower the potential IHT. She gives away £500,000 to her children in April 2020. If she survives seven years it won’t count as part of her estate for IHT purposes.
Death within seven years
Sadly, Jane dies in April 2025 before seven years have passed since she made the gift to her children. The £500,000 is therefore chargeable to IHT and adding this to the value of her other assets equals £900,000; the IHT bill on her estate is £300,000.
Example 2 – with a trust
The circumstances are the same as the previous example except Barry leaves his shares to a discretionary trust. No IHT is payable on this because business property relief applies. The income from the shares held in trust is paid to Jane, so she’s no worse off than if she personally owned the shares. When the shares are sold in April 2017 the trustees give £500,000 to Jane’s children. When Jane dies the money in the trust doesn’t count as part of her estate and so her IHT bill is worked out on the value of her other assets, i.e. £600,000. The result is zero IHT, an apparent saving of £300,000 compared to the first example.
Trust a trust
The tax saving made on Jane’s estate is watered down slightly because the trust has to pay IHT each time it passes money to her children. However, it amounts to only £11,000, which means the beneficiaries of Jane’s estate will save IHT of £289,000.
Conclusion
Our examples show just one situation where a discretionary trust can produce an IHT saving. If you think that a trust might work for you, it’s advisable to consult a tax expert who specialises in estate planning.
We can help
We have been helping our clients for many years in the areas of Estate Planning, Will Writing, Trust and Executorships hence we can bring specialist knowledge in helping you too. Contact us on 01753 892 815 or email info@hmiller.co.uk to find out more.