Lifetime Trusts And IHT Implications
Creating a will is a crucial aspect of safeguarding your assets for your loved ones after your passing. By outlining your preferences for your dependents in the event of your passing, you can ensure that your preferences are followed.
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Creating a will is a crucial aspect of safeguarding your assets for your loved ones after your passing. By outlining your preferences for your dependents in the event of your passing, you can ensure that your preferences are followed.
A will can, however, be limited in its ability to provide comprehensive protection for your estate. It can only specify your wishes and does not safeguard against various factors that can impact upon the value of your estate or your wishes, such as Inheritance Tax, care costs, and the deterioration of relationships.
Determining the most suitable type of trust for your needs can be challenging, given the diverse range of trusts available and their unique features. Many people may not fully comprehend the advantages of trusts, particularly as the Inheritance Tax system is subject to constant review by the government. However, mitigating Inheritance Tax is just one of the benefits that trusts can provide.
Types of trusts
A Will Trust is a trust that is established only upon the death of the will maker. It is created as part of your will, and becomes active upon the will maker’s death.
In contrast, if you set up a Lifetime Trust, this is created immediately and not upon your death. Lifetime Trusts can be utilised to make gifts during your lifetime, and based on the type of trust chosen, you may be able to continue to benefit from your assets while ensuring that they are protected.
Lifetime Trusts serve as a useful means of managing, safeguarding and regulating assets, funds, and properties, including one’s primary residence, while still alive.
Upon their creation, Lifetime Trusts become operational, and they empower the trustees to hold assets for the benefit of the beneficiaries, as set out in the trust deed. These trusts provide a means of specifying precisely when and how the assets are to be passed on to the beneficiaries.
What trust is right for me?
The most suitable type of trust for an individual will depend on their particular circumstances and the objectives they wish to achieve.
Trusts are primarily divided into two categories based on how income or capital is managed. These categories are Interest-in-Possession Trusts, which provide income or use to a specific beneficiary, for a certain period, or during their lifetime, and trusts which are subject to the relevant property regime.
The most popular benefit of using trusts is its potential to reduce Inheritance Tax liability. When you transfer gifts to a trust, it may decrease the tax payable on your estate, provided that you survive for at least seven years after the gift has been made. Additionally, trusts can be used to direct income to beneficiaries, which can then be treated as part of their taxable estate rather than yours, subject to specific conditions.
Tax implications
There are tax implications you ought to consider if you decide to utilise or create a trust while you are alive. If any transfers into the trust are of a value higher than £325,000 (the present nil rate band), you may have to pay inheritance tax. The lifetime rate of inheritance tax is 20% on the amount that exceeds the present nil rate band. It is important to note that any transfers into a trust / lifetime gifts within the prior seven-year period will decrease the available nil rate band. The tax rate rises to approximately 25%, due to grossing up, if you wish to pay the tax yourself on the transfer of funds rather than utilise the trust assets to do so.
If you pass within seven years of making a transfer into a trust, any applicable inheritance tax charges will be reconfigured at the death rate.
There is a tax relief known as taper relief which may be available to you. This relief is available when inheritance tax is due on a gift made within the last seven years of your life. If you pass between three and seven years of the gift / transfer into the trust being made and inheritance tax is due, the rate of tax which is payable may be reduced. The reduction in the amount of tax paid correlates with how long ago the gift was made.
For example, if the gift was made between years six and seven prior to your death the gift will be subject to inheritance tax at a rate of 8% instead.
Other charges to be aware of
If the trust vehicle is a discretionary trust, trusts also attract an anniversary charge. This occurs every 10 years and any applicable tax is paid out of the trust by those you have instructed to manage the fund, your trustees.
Similarly, when a withdrawal from such a trust takes place an The amount charged is determined by the quantity of quarter years that have passed within the 10-year period before the withdrawal is made.
If the trust generates any income or capital gains these will also be taxable.
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If you would like further advice on lifetime trusts and their implications, please contact us to speak to someone in our private client team.
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