Inheritance Tax  

Trusts: What you need to know

This article is part of
Intergenerational wealth planning (Part I)

“These are designed for people who want to give money to a trust but still retain the ability to draw down a regular income – up to 5 per cent – for the rest of their lives.” 

Setting up the right trust

As a range of trusts could potentially be useful for inheritance tax planning, advisers will need to select the right one for the client.

Advisers will also have to make sure the trust is set up properly if it is going to be effective and will also need to be aware of not only the benefits but also the drawbacks, restrictions and possible charges, suggests Patrick Connolly, chartered financial planner at Chase de Vere.

He explains: “A trust is a legal arrangement where one or more trustees are legally responsible for holding assets for the benefit of one or more beneficiaries. 

“The creation of a trust is a transfer of value for inheritance tax purposes, which means that tax could potentially be payable when the trust is set up, particularly if larger sums are moved into a trust.”

The person creating the trust will appoint the initial trustees. 

He continues: “A trustee can be any adult who has full mental capacity. 

“However, you’ll need to make sure they are willing to be a trustee and that you are confident they can perform the required duties.”

He adds: “It is common for the settlor to be a trustee, which means they can have a degree of control over the trust assets.”

However, he suggests it is important to be careful to ensure that the settlor is not a potential beneficiary, because with some trusts, HM Revenue & Customs could regard this as a reservation of benefit so it will not be effective for inheritance tax purposes.

He adds: “A beneficiary can also be a trustee. Where trustees have discretionary powers, it is advisable to have at least one independent trustee who can’t benefit from the trust.”

How are trusts tax effective?

Trusts have been used for many centuries as a way of passing on wealth, according to Gill Philpott, tax and trust specialist at Ascot Lloyd.

She says: “While direct gifting is available, this may not be a preferred route, particularly if the beneficiary is young, there is concern over their relationship or financial status, or if the next generation already has taxable estates and different financial needs. 

“The use of a trust will allow assets to be protected and their future destination managed in a tax-efficient manner over the next 125 years if desired – the current time over which a trust can be set up for – helping with generational tax planning over the longer term.”

She adds: “The flexibility of trusts means there are trusts to suit almost all circumstances.”