Anyone can use a trust to reduce inheritance tax liability on their estate, enabling them to pass on more wealth to their beneficiaries.
While trusts are one of several tax-efficient ways to reduce the value of an estate, they are also the most complex inheritance tax planning method.
It’s fair to say that trusts are widely misunderstood, and generally overlooked among people who are looking to take charge of their estate.
For example, more than one in four people didn’t know they could write their life insurance policies into trusts in 2018/19.
That resulted in more than 6,000 estates unnecessarily paying inheritance tax, worth more than £280 million – and it could’ve been legally avoided.
When you put assets like money, property or investments into a trust, subject to certain conditions being met, you no longer own that asset. This means it might not count towards your inheritance tax bill when you die.
Instead, the asset belongs to the trust. For example, if you were to put your savings into trust, they would sit outside of your estate and would not be assessed for inheritance tax purposes.
In a case like this, you would have to appoint a trustee to be the custodian of the trust, and they will have an obligation to look after and manage the assets for the beneficiary.
You also get to set the rules when you put one of your assets into trust. You could say your children can only access the trust when they turn 30, for example. In order to understand how you can use a trust to reduce inheritance tax, it helps to understand the different types of trust that exist.
Types of trust
Bare trusts are the simplest type of trust, in which your beneficiaries inherit the trust on their 18th birthday. These are usually exempt from inheritance tax, as long as you transfer the asset into the trust at least seven years before you die.
Interest-in-possession trusts usually mean your beneficiaries can get an income from the trusts, but they cannot access the assets which generate that income. People who remarry, but have children after their first marriage, often find this type of trust useful.
Discretionary trusts result in the trustee calling the shots in terms of how the assets are distributed. For example, a grandparent could set up one of these trusts and appoint their grown-up child as the trustee. That trustee would use their own discretion to distribute the assets to the grandkids.
Mixed trusts draw upon different elements from the aforementioned trusts, but these can get quite complex quite fast. For that reason, you will need expert advice, which we can provide through our private client team or personal tax specialists.
So, we’ve established that it is possible to reduce inheritance tax that you’ll pay on your estate by writing assets into trust – but only if certain conditions are met.
Trusts are an important estate planning tool, although trust law is complex and it’s possible to walk into an immediate tax charge when setting it up if you are not careful. We can help you avoid that, please do not hesitate to contact us or call us on to find out more.