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Using Trusts to Cut your Inheritance Tax

Inheritance tax is often seen as a bane by taxpayers. No one wants to pay tax on assets they’ve already paid tax on. However, paying taxes on inheritance is a must according to the UK government’s guidelines. 

Trusts are an effective way to avoid paying taxes. You even have control over your assets in certain types of trusts. 

What is a trust?

A trust is a legal instrument to manage your assets. It is a legal agreement where you give cash, property, or investments to someone else to take care till the person for whom it is intended is ready to inherit them. For example – leaving a trust for underage children to inherit when they turn 18. (You can decide the age you want them to get access to the trust.)

If you put money and assets in a trust, you can no longer control the assets, unless certain conditions are met. The amount that you put in is exempt from your estate while calculating inheritance tax. 

Trusts can help avoid taxes other than inheritance tax like income tax and capital gains tax. 

Components of a Trust 

A trust has two important roles that one needs to understand – 

Trustee – This is the person who owns the assets that will be put in the trust. This person has the power to dissolve or append the trust. It is the trustee’s responsibility to manage the trust and run it. 

Beneficiary – This is the person who will get the trust, eventually. The assets in the trust are for their benefit. 

The assets in the trust are safe for the beneficiary to use later when the time comes. The trustee can keep control and protect the assets for the beneficiary with the help of a trust. 

Planning a trust is a part of estate planning which is done to ensure that fewer taxes are paid, and the deserving get the estate.

How inheritance tax works

The HMRC imposes tax to redistribute wealth and ensure some level of equality. 

Rich heirs could just live on the inheritance, without being productive members of the society. 

The provisions to save tax are devised so that the excessive assets are distributed in ways the HMRC wants. 

How to set up a trust to avoid paying inheritance tax

An individual can make a trust at any time or write for one to be created in their will. 

The things that are imperative while setting up a trust are  –

  • Assets in the trust 
  • Trustees and beneficiaries
  • The time when the trust becomes active

Trusts can be registered online with the HMRC. You’ll need a government organization gateway user ID and password.

A trusted inheritance tax planner can help you select the right trust for the maximum tax benefit. 

Types of trusts

There are many types of trusts you can choose from, each with different benefits. It can become quite complicated when you have to choose the right one. Only experienced tax planners can advise you properly. 

Here are a few trusts you can choose from – 

Bare Trusts – The simplest trust that a minor can inherit once they are of a suitable age. These trusts may be taxable once they are inherited.

Interest in Possession Trusts – The beneficiary does not have the right to use the property or cash in the trust but can use the income from them. You will have to pay income tax on the income received. 

Discretionary Trusts – The trustees can decide how to distribute the assets in the trust. They can also make investment decisions on behalf of the trust. 

Accumulation Trusts –  These trusts can keep adding the income they make to the trust capital. This keeps the trust growing and may not attract income tax. 

Mixed Trusts – You can combine different elements from other trusts.

Trust for a Vulnerable Person – Trusts for children or disabled people may get a special tax benefit. 

Non-Resident Trust – If the trustees reside outside of the UK, they may be exempt from paying income tax on the trust. 

Conclusion

While inheritance tax planning seems easy, it may not be if you have a big estate. The bigger the estate the harder it gets. You could be able to avoid more tax if use you use the right estate planning techniques.

Trusts are a good way to keep in control of your assets as well as avoid inheritance tax because of their flexibility. Use a mix of trusts to avoid paying more taxes like income tax. 

A trusted inheritance tax planner can help you make the correct mix most beneficial for your estate. Never pay more in taxes again.

 

 

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