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Inheritance tax and trusts: how they work

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I will explain how the trust works and whether it will lead to the reduction of inheritance tax.

Trusts give you some control and flexibility over who gets the benefit and when. Instead of simply handing over assets such as money or property to an individual, a trust allows you to hold those assets until a later date.

Potential savings on Inheritance Tax (IHT) at a rate of 40%. This is because the size of your estate will be reduced and you may be able to retain your IHT benefits.

This guide covers:

read more: What is the standard amount for inheritance tax?

What is a Trust?

A trust is a legal arrangement that transfers assets indirectly. A trust has one or more beneficiaries, but a trust is held and administered by someone else, a third party known as the trustee.

A common arrangement is for grandparents to put funds into a trust for their grandchildren, with the parents as trustees. In this way, the beneficiaries do not get a large amount of cash while they are still young, but rather keep that money until they are older and able to make informed financial decisions. will be held in trust.

Another reason to set up a trust is to help vulnerable or disabled people who have difficulty managing their own money.

The two most common types are discretionary trusts and bear trusts.

read more: “Can I Avoid Inheritance Tax Without Getting Married?”

How do discretionary trusts work?

Discretionary trusts are usually chosen because of their flexibility. It is not necessary to specifically designate all beneficiaries immediately. Therefore, if you are a grandparent, your discretionary trust may also include future grandchildren.

It is also up to the Trustees to decide how the funds are distributed.

Pros of Discretionary trust

  • Flexibility: Ability to adjust as family members add or circumstances change
  • Enhanced protection: Assets in the trust are separate from the beneficiaries’ personal assets, so the assets cannot be touched in the event of a divorce or other legal dispute.
  • Income Flexibility: Income can be received from a trust or accumulated to benefit from compounded growth over time.
  • IHT Relief: Putting funds in a trust may reduce inheritance tax (see below)

Cons of Discretionary trust

  • Lack of Certainty: Beneficiaries do not have a guaranteed right to the assets or money in the trust. In return, the trustee has the power to distribute the assets as he sees fit.
  • Complexity: Setting up a voluntary trust can be complex, so legal advice is recommended.
  • Ongoing administration: There are ongoing administration, tax and compliance requirements that the trustee should consider.

read more: “Will I have to pay inheritance tax if I pay my grandchildren’s school fees?”

Bear Trust: Advantages and Disadvantages

Unlike discretionary trusts, in bear trusts (often used to transfer assets to young people) the beneficiaries have fixed rights to the assets. A trustee can withdraw money from the trust from the age of 18 (in Scotland she is 16), but a trustee can withdraw money earlier for the benefit of the beneficiary. For example, parents can withdraw money from the trust to pay school fees. price.

Advantages of Bear Trust

  • comfortable: Easier to set up than a voluntary trust.Open a bear trust in minutes with a small amount of capital
  • IHT Relief: Money and assets deposited in a bare trust should be exempt from inheritance tax as long as the bequestor lives seven years after transferring to the trust.
  • Tax Efficiency: Income is taxed at the child’s marginal tax rate, making it more likely to be tax-free.
  • Early Access: Access funds before your child turns 18. In other words, bear trusts are sometimes used in place of junior ISAs as they have more flexibility in when funds can be accessed.

Cons of Bear Trust

  • Beneficiaries have full rights: Beneficiaries have full control over the assets in the trust from the age of 18, so bare trusts are not suitable for those who are vulnerable or have difficulty managing their own money There is a possibility.
  • Limited Asset Protection: Because trusts have designated beneficiaries, assets may be accessed due to potential bankruptcy or debt.
  • Simplicity: Easier to set up than voluntary trusts, but may not be suitable for more complex situations.

read more: How Inheritance Tax Works on Gifts in the UK

Inheritance Tax and Trusts: How You Can Reduce Your IHT Claims

By placing money or assets in a trust, you are giving up rights to them. This means they have left your property and if you die at least 7 years after they were transferred to the trust, their value may not count for IHT purposes.

Not everyone’s property is subject to inheritance tax. About 4% according to government statistics A 40% IHT claim is incurred in the event of a death. IHT liability for the assets you leave if your estate totals less than the zero inheritance tax rate threshold of £325,000 or less than £500,000 if you leave principal residential property to your children or grandchildren does not occur. If you are married or have a civil partnership, the allowance will double to £650,000 or £1 million respectively.

Therefore, it is only necessary to consider how the trust can save on IHT payments if the value of the property exceeds these standards. The standard amount of inheritance tax is explained in detail in the guide.

Another reason people set up trusts is because the £175,000 ‘housing interest free zone’ only applies if the property value is less than £2 million. Beyond this, the principal residence allowance begins to be reduced.

Therefore, someone with a fortune of £2 million or more may consider donating money or assets to reduce their fortune to below that figure. As long as you live seven years, a trust can be an indirect and effective way to do this. After moving.

However, if you set up a discretionary trust, be aware that if the value of money and assets deposited in the trust exceeds the zero tax rate IHT threshold, you will be subject to inheritance tax at 20%. For example, say you transferred property worth £400,000 and his allowance is £325,000. A 20% IHT would pay a £75,000 difference, or a £15,000 bill.

Will the trust bypass the probate process?

Probate is the legal process, usually set out in a will, that determines how a person’s money and assets are to be distributed according to their wishes after their death. It may take several months for probate to be completed.

After the person’s death, the trust must bypass probate proceedings because the person who entrusted money or assets to the trust no longer has legal title to them.

read more: How does the probate process work?

how to open a trust

Bear Trust is usually offered by investment platforms and the process is straightforward. best investment* and Hargreaves Lansdowne* There are two companies that offer these, but there are many others.

Discretionary trusts are more complicated, and it’s worth consulting with an attorney.of Law Society If you want to set up a lawyer, we can help you choose a lawyer who specializes in this area.

*All products, brands and properties mentioned in this article have been selected by our writers and editors based on first-hand experience and customer feedback, and meet the standards we believe our readers would expect. It is thought that there are This article contains links that can be monetized. This revenue supports the content of this website and helps us continue our investment in award-winning journalism. For more information, see How we make money and editorial promises.

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Some of the products advertised are from affiliate partners for whom we are paid. While we aim to showcase some of the best products available, we cannot review every product on the market.

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