Using a Trust to Reduce Inheritance Tax
Placing your property in a trust will typically mean you no longer own your property and therefore it cannot be included as part of your inheritance tax bill when you die. The property you can put into a trust includes money, investments, land or buildings and other assets such as paintings.
A trust is a legal arrangement where you give your property to someone else to look after for the benefit of a third person, such as a child. That person or company will look after the assets in the trust until the third person reaches the age set out in the trust. For example, the trust could state that children can access the trust when they are 25. There are two important roles in a trust:
- The trustee – the person who legally owns the assets placed in the trust. The trustee is responsible for running and managing the trust.
- The Beneficiary – The person who the trust is set up for. This is the person who will benefit from the trust but is deemed too young or unsuitable to manage the trust assets themselves.
If you are considering using a trust to reduce the amount of Inheritance Tax payable on your estate, there are many factors to consider. It is imperative you understand the rules of the trust and any implications that may apply. Before setting up a trust it is advisable to seek independent financial advice from a financial adviser, such as Castlegate in Lincoln.
Our team of expert financial advisers in Lincoln will work in partnership with you to ensure you have all the information you need to make informed decisions about setting up a trust to help reduce the amount of Inheritance Tax payable on your estate.
Different types of trusts
There are several types of trusts available and each has its own rules in relation to Inheritance Tax, Capital Gains Tax and Income Tax. To ensure you understand the rules of the trust you are setting up it is advisable to seek independent financial advice to ensure you are making informed decisions and have effective wealth management and tax mitigation strategies in place. The different types of trust include:
- Bare trust – one of the simplest types of trust that gives everything to the beneficiary once they are 18.
- Interest in possession trust – this type of trust allows the beneficiary the right to receive an income from the trust, but does not give them ownership of the trust property. Any income generated by the beneficiary will be liable for income tax. This type of trust is often set up by people who have remarried and have children from previous relationships. The new spouse can claim an income, but when the person who set up trust dies the property is passed on to the children.
- Discretionary trust – trustees of a discretionary trust have absolute power to decide how the assets in the trust are distributed and can make investment decisions on behalf of the trust. Such trusts can last for many years and permit intergenerational financial planning.
- Trust for a vulnerable person – if the only beneficiary of a trust is a vulnerable person, i.e. an orphaned child or someone with diminished capacity a vulnerable person trust can be set up. There is usually less tax to pay on income and profits for this type of trust.
There are trusts which permit you to retain an income yourself whilst gifting the underlying assets with view to reducing inheritance tax, or even just gift the growth from investment to a Trust leaving the capital for your own benefit and effectively “cap” the value of your estate.
Placing existing life assurance policies in trust or redirecting pension death benefits to a trust can also be very effective ways to reduce the value of your taxable estate.
If you are interested in reducing your potential inheritance tax and maximising the value passed on to your family it is advisable to seek independent financial advice. This will ensure you understand the rules of any trusts recommended and are making informed decisions about your estate. Our team of financial advisers in Lincoln can provide advice on all aspects of setting up a trust and trust information. Working with a financial adviser will ensure you are making informed decisions about your estate and have the most effective wealth management and inheritance tax mitigation strategies in place.
At Castlegate, we are an independent financial adviser providing advice in Lincoln and across the East Midlands. As an experienced independent financial adviser in Lincoln we provide financial advice that is tailored to your unique personal circumstances.
If you have questions about setting up a trust to reduce Inheritance Tax or are looking for an independent financial adviser in Lincoln or across the East Midlands, please do not hesitate to get in touch to talk about the most appropriate solutions for your personal circumstances and financial objectives.