Inheritance tax, also known as IHT, is a tax that is levied on the estate of a deceased person before the assets are passed on to their beneficiaries In the UK, inheritance tax is currently set at 40% on estates worth over £325,000 With the rising value of property and assets, more and more people are finding themselves subject to this tax, which can significantly reduce the amount that beneficiaries receive.
However, there are ways to reduce or even avoid inheritance tax through the use of trusts Trusts are legal arrangements where assets are set aside for the benefit of others, overseen by a trustee By placing assets in a trust, they are technically no longer part of the estate and therefore not subject to inheritance tax This can provide a way to pass on wealth to future generations without the hefty tax bill.
There are several different types of trusts that can be used to avoid inheritance tax Here are some of the most common ones:
1 Bare Trusts
Also known as absolute trusts, bare trusts are the simplest form of trust arrangement In a bare trust, the assets are held in the name of a trustee, but the beneficiary has the right to the trust’s assets and income from the age of 18 (or 16 in Scotland) Since the beneficiary is entitled to the assets, they are treated as the legal owners for tax purposes As a result, any assets held in a bare trust are not subject to inheritance tax as they are not considered part of the estate.
2 Discretionary Trusts
Discretionary trusts are a more flexible form of trust arrangement where the trustee has the discretion to decide how the trust’s assets are distributed among the beneficiaries This can be useful for protecting assets for future generations, as the trustee can take into account changing circumstances and needs Assets held in a discretionary trust are not subject to inheritance tax until they are distributed to the beneficiaries.
3 trusts to avoid iht. Interest in Possession Trusts
An interest in possession trust gives a beneficiary the right to the income generated by the trust’s assets, known as the life tenant The life tenant does not have control over the underlying assets, which are held by the trustees This type of trust can be set up to provide a regular income stream to a beneficiary while protecting the assets from inheritance tax.
4 Charitable Trusts
Charitable trusts are a tax-efficient way to pass on assets while supporting a charitable cause By donating assets to a charitable trust, the value of the donation is deducted from the estate before inheritance tax is calculated Charitable trusts can also benefit from tax relief on any income generated by the assets held within the trust.
5 Nil-Rate Band Discretionary Trusts
One of the most common ways to reduce inheritance tax is through the use of nil-rate band discretionary trusts In the UK, each individual has a nil-rate band of £325,000, below which no inheritance tax is charged By transferring assets into a discretionary trust up to the value of the nil-rate band, individuals can effectively double the amount that can be passed on tax-free to their beneficiaries.
It is important to note that the rules surrounding trusts and inheritance tax can be complex, and it is advisable to seek professional advice before setting up a trust Trusts must be set up correctly and managed in accordance with the law to ensure they are tax-efficient and provide the intended benefits to beneficiaries.
In conclusion, trusts can be a valuable tool for reducing or avoiding inheritance tax and passing on wealth to future generations By exploring the different types of trusts available and seeking expert advice, individuals can ensure their assets are protected and their beneficiaries receive the maximum benefit Trusts offer a way to preserve family wealth and support charitable causes while minimizing the impact of inheritance tax.