The Right Type of Trust Will Offer Your Loved Ones Protection and Security
If you are using a trust for Inheritance Tax planning, it is important to take care that you create the correct type of trust for your needs.
You should also take care as to how many trusts are created and the type of assets which are to be held in each trust. The timing of creating the trust as opposed to other gifts should also be taken into account.
All assets held within a trust are subject to tax under UK tax laws. This means that if you place assets in a trust, they will be liable for taxation. It is important that this factor should be born in mind when setting up a trust. For taxation purposes, trusts are normally settled during the lifetime of the person involved. These trusts fall into two categories, either Absolute Trusts or Bare Trusts or, alternatively, Flexible of Discretionary Trusts.
A bare trust sets out the beneficiaries and this is fixed and cannot be altered at a later date, whatever the circumstances. The beneficiaries of this type of trust have a right to any assets held in the trust upon the age of eighteen.
A Discretionary Trust is similar in that the beneficiaries are named, but the trustees are given a role to advance income or other assets should they feel that this is appropriate for the circumstances involved.
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A person’s gift to a bare trust is a Potentially Exempt Transfer, or PET. This is outside the estate of the settler should the settler survive for seven years from the date the gift was given. If, however, the settler dies within this timeframe, the Potentially Exempt Transfer will fail.
A gift given to a Discretionary trust is considered to be a Chargeable Lifetime Transfer, or CLT. This is subject to Inheritance Tax at the rate of 20% on the gift’s net value if it is over and above the balance of the settlor’s nil rate band, allowing for any cumulative chargeable transfers in the seven years previous.
The value of a gift is considered to be outside of the settlor’s estate should they survive for seven years after the gift has been given. If, however, they die within the seven years, a further inheritance tax charge becomes payable on the original net value of the gift at a rate of 20%.
As we can see, if a PET or CLT is being made, great care should be taken to ensure that the timing ensures maximum tax efficiency.
Discretionary trusts are liable to a tax charge on the value of their assets, every ten years over the nil rate band on the date of the tenth anniversary (this also includes previous distributions). All distributions from these trusts are likely to incur a tax charge; however, with the correct advice and planning, these can often be avoided.
Any income which is received by a trust becomes liable for income tax, and any gains within a trust are liable for capital gains tax.
However, by carefully selecting the assets which are held in a trust, these taxes can often be avoided.
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