Trust and Tax Planning

Trusts are a legal arrangement whereby assets are placed into the care of an individual who manages them for the benefit of someone else.

For the person placing the assets into the trust, they know that they are being properly looked after until they come under legal control of the person who is intended to reap the rewards.

There are also tax advantages to setting assets aside in a trust.

A trust is a relationship between 3 parties:

          • the settlor places the assets in the trust

          • the beneficiary benefits from the assets in the trust

          • the trustee manages the trust on behalf of the settlor and beneficiary.

By placing money, investments, land or property into a trust the settlor effectively relinquishes ownership over them.

There are many different types of trust, including:

Bare trusts – assets placed in the trust are held in the name of a trustee, yet the beneficiary has the right to all trust capital and income when they turn 18

Interest in possession trusts – the beneficiary receives income generated by the trust but is not entitled to the underlying assets

Discretionary trusts – the trustees have absolute power how the trust assets are used and distributed.

Is a trust right for you? We can help you decide.

The income that a trust generates may be subject to income tax as well as certain kinds of relief.

However trustees are likely to incur expenses as they go about their duty of managing the assets placed in the trust, and in some situations a trustee will be able to reduce the tax liability of trust income.

Capital gains tax (CGT) is paid on the profit that is created by selling an asset, and may need to be paid in relation to trusts. However there are some instances when an asset can be moved but CGT is not liable.

Firstly, if a person dies and they leave their assets to the beneficiary there is no CGT liability. This may change if the asset is later sold at an increased value since the death in question. This is the case for both trustees and beneficiaries who inherit the asset through the terms of a will or intestacy.

Secondly, when an individual dies who is a beneficiary of an interest in possession trust and their right to an income from the trust comes to an end.

We can help you work out your CGT liability.

Inheritance tax

When calculating inheritance tax (IHT) liability, the difference between excluded and relevant property is important.

Most property held in trusts will be classed as relevant property and will therefore be included in IHT calculations.

IHT may be due on assets held in a trust if:

          • they are transferred out of a trust

          • they have been in the trust for a decade.

There are numerous exceptions to this general rule so make sure to talk to an expert when working out whether assets have a potential IHT liability.

Transfers into a trust

For the majority of trusts, IHT at 20% will be due if transfers are more than the IHT threshold of £325,000.

If the person making the transfer dies within 7 years of making a transfer into a trust, the estate will have to pay additional IHT. The rate will depend on the length of time between transfer and death.

Secondly, when an individual dies who is a beneficiary of an interest in possession trust and their right to an income from the trust comes to an end.

Transfers out of trust

Assets can be transferred out of a trust in certain situations, such as:

          • the trust formally ending

          • some assets being given to the beneficiary

          • the beneficiary becoming legally entitled to use the asset.

There is an IHT exit charge applied to most transfers out of a trust. The maximum charge is 6%.

10-year anniversary.

IHT is charged at every 10-year anniversary and is charged on the net value of the relevant property in the trust on the day before the anniversary. The way this charge is calculated is complex, so get in touch with us for more technical information.

If the beneficiary dies

The legal entitlement of the beneficiary to income generated by, or the assets held in, the trust differs depending on the type of trust and this will effect what happens if a beneficiary dies.

For a bare trust, because the beneficiary is entitled to both the income and assets of the trust, they become part of their estate when they die.

An interest in possession trust on the other hand differs because the beneficiary is only entitled to the income generated by the trust. There are certain circumstances where the value of this type of trust will be added to the deceased’s estate.

For more information on trusts and IHT, get in touch today.

We can help you create an effective trust strategy.

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