If you are considering where you want your wealth to go when you are no longer around to spend it, it might be time to think about setting up a trust.
A trust is a private legal arrangement, which lets an individual transfer their assets to a private fund. This fund can then be controlled and used according to the directions they leave. A trust can be the answer if you have a beneficiary who is too young or lacks the capacity to handle their own affairs, because rather than simply giving them a lump sum, it lets the money be managed on their behalf.
But what really makes trusts so popular is the fact that they can be set up to help protect their contents against tax.
Who uses trusts?
Trusts have been used for hundreds of years by wealthy families to ensure that cash, land, property and investments can be passed down to the next generation rather than to the taxman. These days, you don’t need to be from the landed gentry to have wealth that needs protecting – any individual who leaves an estate in excess of £325,000 (the nil rate band) will attract Inheritance Tax (IHT) at 40% in the current tax year. Current legislation allows the transfer of the percentage of any unused NRB on a person’s death to the surviving Spouse or Civil Partner.
A trust can therefore play an important part in estate planning. If they are properly arranged, they can reduce the potential inheritance tax charge, keeping the taxman at bay and leaving your loved ones with more.
How trusts work
You can decide how things will work with a trust. In fact, setting up a trust can be an effective way to control and protect your wealth during your lifetime as well as ensure that your estate is distributed according to your wishes.
If you have money or assets you want to put into trust, you are known as the settlor, those who administer the trust are known as trustees, and those who ultimately benefit are beneficiaries.
As a settlor, when you make your decisions and gift the assets, you set out in a document, the Trust Deed, how those assets are to be dealt with. You can stipulate who will benefit from the trust and how much they will receive, exactly how the trust will be managed, and who you want to do it.
The day-to-day responsibility of the trust property becomes the responsibility of the trustees. You can even be a trustee, and still control and manage the property that you have given away. It means that your decisions can be adapted as circumstances change.
The tax position on trusts
Why go to all this trouble? When you put money or property in a trust, you don’t own it any more. Instead, the cash, investments or property belong to the trust. In other words, once the property is held in trust, it’s outside your estate for inheritance tax purposes.
This means it might not count towards your Inheritance Tax bill when you die – if you meet all the necessary rules and conditions.
However, trusts themselves can be subject to taxes. Chargeable Lifetime Transfer was introduced in 2006.
This can mean that any transfer into a trust above the nil rate band is subject to an entry tax of 20% and a periodic charge which is subject to a maximum of 6% of the excess above the available nil rate band. There is also the potential for an exit charge when money is paid out.
Trust Continuum to provide the help you need.
The information contained in this article is based on the opinion of Continuum and does not constitute financial advice or a recommendation to suitable investment strategy, you should seek independent financial advice before embarking on any course of action.
The Financial Conduct Authority does not regulate wills, tax and trust advice.
Levels and basis of reliefs from taxation are subject to change and depend upon your personal circumstances.
yourmoney.com – Why trusts aren’t just for the wealthy – 25th November 2018
investopedia.com – How To Set Up A Trust Fund In The U.K.
gov.uk – Trust Taxes