Changes to Inheritance Tax
There was a great deal of media coverage following the changes to UK Inheritance Tax announced in November 2024. Most of this revolved around how these changes would affect farmers and agricultural businesses. However, many other types of business owners will be affected, plus people with large ‘pension pots’. A number of people, including Jeremy Clarkson, suggested the use of Trusts to reduce the effects of this change. Following this coverage the Sunday Times ran an article offering advice on how a Trust can help with Inheritance Tax. Note: This article is behind a paywall.)
The Benefits of a Trust
Many people believe that a Trust is solely for the benefit of the wealthy or celebrities. Quite simply, this is not the case. Increasing numbers of ordinary, hard-working families come to us to protect their home, and other assets with a Trust. Following sensible advice, a family can essentially transfer ownership of their property, and other items of value, to their Trust. A Trust has a different legal status to individuals and thus can be viewed differently when it comes to tax issues.
A Discretionary Trust is most often the best option for families looking to control their assets in this way. The Trustees of the Trust have discretion on how the assets in the Trust are used, invested and distributed, in accordance with the Settlor’s wishes and following various legal duties. The Settlor is the person who sets up the Trust, and who builds in their wishes for how their assets are to be used. This can include restricting beneficiaries from inheriting until certain criteria are met, for example marriage, having children, or even getting a divorce. Other stipulations can often include a beneficiary being free from addiction or debt.
Inheritance Tax and Trusts
Contrary to what many people believe, assets held in Trust are not exempt from tax. However, there are tax benefits to be gained, including with Inheritance Tax. Many people will have heard of the seven-year rule, where a gift given to a beneficiary normally avoids Inheritance Tax when the giver of the gift lives for at least a further seven years. As individuals we can all pass on up to £325,000 Inheritance Tax free. If a Settlor chooses to put money or property up to this value into a Trust, after seven years it also benefits from this zero rate, as long as the Settlor does not benefit from those assets. This then allows the Settlor to add further assets to their Trust, which again after seven years would be free from Inheritance Tax as a separate gift.
For married couples who set up a joint Trust this allowance can be combined, allowing for up to £650,000 to be transferred into Trust every seven years. As this is well over the value of most UK properties, planned in advance this has great benefits for the beneficiaries. Again this is also assuming that the Settlor is not retaining a benefit of Trust.
It is important you take professional advice as periodic and other tax charges could apply to the trust, however for some well managed Trusts, which benefit generations of the same family, the combined tax and annual fees of maintaining the Trust will be lower than had full Inheritance Tax been paid on the full Estate at the time of death.
Should you set up a Trust to beat Inheritance Tax?
If you are considering using a Trust to save Inheritance Tax on your Estate the answer is to take professional advice. Lifetime Trusts, like Asset Protection Trusts, are not suitable for everyone and are at the more costly end of Estate Planning. However, for those with multiple properties, or even complex requirements for how their family will inherit, they can be an ideal solution. An ideal solution which, if planned properly and in advance, can also reduce the amount of Inheritance Tax paid.
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