Trusts: An introduction

The comedian Rik Mayall shocked the British public last year after he died suddenly at the age of 56. Almost a year on, the future of his £1.2 million estate has been thrown into doubt after it emerged that he failed to leave a valid will, thereby leaving his assets ‘intestate’.

Under intestacy rules, Mayall’s 3 children will automatically inherit a share of the estate, potentially exposing them to a 40% inheritance tax (IHT) charge. According to reports, his wife will receive £250,000 plus the value of his personal belongings. The children will then inherit half of the remaining value.

There are plenty of tools in the arsenal of the careful estate planner that can mitigate the effects of IHT. One of the most effective means of doing this is by using trusts.

Why set up a trust?

Trusts allow you to manage assets on behalf of other people. They can be used to:

·         protect inheritance for under-18s and people who are incapacitated

·         hold family assets

·         pass on assets during life or after death.

Although the tax benefits of putting assets into a trust diminished with the passing of the Finance Bill 2006, trusts remain a good way of lowering your IHT bill when you pass on assets after your death.

Types of trust

There are many different types of trust, each with their own pros and cons. The 4 main types of trust are:

·         Bare trusts
A simple form of trust where the beneficiary receives all of the assets when they reach 18 years-old. The trustee has no discretion in how the assets are handled.

·         Discretionary trusts
The trustees exercise discretion over how the trust’s income is distributed among the beneficiaries.

·         Interest in possession trusts
The beneficiary has access to income generated from the trust straight away, but cannot access the cash, investments and property. Usually, once the first beneficiary dies the assets pass on to a second beneficiary.

·         Accumulation and maintenance trusts
The trust pays income to the beneficiaries until a specified age when they receive both the assets and income.

Trusts and IHT

IHT is charged on transfers in and out of trusts, when someone dies and on every 10 year anniversary. Your IHT liability will depend on the type of trust you have created and the value of the assets held by the trust. For example, assets placed into a ‘relevant property trust’ are charged 20% IHT on amounts exceeding the £325,000 nil rate band. Bereaved minor’s trusts meanwhile have their own separate tax benefits compared to normal discretionary trusts.

The government has been consulting on how IHT is applied to trusts so the rules may change in the future.

The taxation of trusts is a complex subject and you should always seek expert advice before entering into an agreement.

Talk to the experts

We can minimise your exposure to IHT. Contact us on 01753 892 815 or email to find out more about our trusts and executorships service.

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