Beginners' guide to Inheritance Tax Planning

Trusts

One of the best ways to help keep the taxman’s hands off your money is to put your assets in trust. The rules changed in 2006 making some of them less tax effective, as a small minority will require you to pay IHT even before you have died, but they’re still worth considering. When talking about trusts, you will hear the terms:

• Settlor – the person setting up the trust.

• Trustees – the people tasked with looking after the trust and paying out its assets.

• Beneficiaries – the people who benefit from the assets held in trust.

There are now three main types of trusts. Any number of different types of investments can be held in a trust so you may want to seek expert financial advice to decide which is best for you.

 

• Bare (Absolute) trusts. With a bare trust you name the beneficiaries at outset and these can’t be changed. The assets, both income and capital, are immediately owned and can be taken by the beneficiary at age 18 (16 in Scotland).

• Interest in possession trusts. With this type of trust, the beneficiaries have a right to all the income from the trust, but not necessarily the capital. Sometimes, a different beneficiary will get the capital – say on the death of the income beneficiary. They’re often set up under the terms of a will to allow a spouse to benefit from the income during their lifetime but with the capital being owned by their children. The capital is distributed on the remaining parent’s death

• Discretionary trusts. Here the trustees decide what happens to the income throughout the lifetime of the trust and how it is paid out. There is usually a wide range of beneficiaries, but no specific beneficiary has the right to income from the trust.

A few trusts will now have to pay an IHT charge when they are set up, at 10 yearly intervals and even when assets are distributed. A financial adviser or other tax expert will be able to explain the exact tax implications of your actions and advise on the right type of trust to set up.