Tax & Accounting News

The role of trusts in Inheritance Tax planning

27/05/2010

Nil-rate discretionary trusts used to be an important tool in Inheritance Tax (IHT) planning, as a way of ensuring both halves of a married couple used up their whole IHT allowance.

Since the introduction of a transferable nil-rate band in 2007, it may on the face of it seem that such tools are no longer needed, since any unused nil rate band on the death of the first partner is now transferred to the surviving partner automatically for use on the second death.

However, while trusts’ usefulness as a tax planning tool has declined, there are other situations where they could play an important role in protecting an individual’s assets from competing family demands, care fees or claims from creditors. They can also be used to protect assets owned by a family business, freeing up IHT allowances for personal assets.

This is particularly true for second marriages, where a trust can be used to ensure assets go to the desired members of the family, while also helping ensure nil rate bands are protected if a widow or widower remarries.

Trusts may also be useful for unmarried couples, as the transferable nil rate band does not apply to them and a trust set up on the death of the first partner can be used to prevent a second full IHT charge when the second partner dies.

A further advantage is that if assets owned jointly by both partners were to rise significantly in value (as property has done in recent years), the IHT allowance may not increase to reflect this. By putting the assets into a trust on the death of the first partner, any subsequent growth in their value would be protected.

Gifts may also be made by an individual for ‘family maintenance’. Such gifts immediately cease to be part of their estate for IHT purposes, provided the money is intended for the recipient’s maintenance. This applies to gifts to children, parents or any other relative who is dependent on the individual concerned for care.

For example, an individual with a child at private school could, instead of paying the fees as they went along, make a gift to their child earmarked for maintenance and education and placed in trust. If that individual subsequently died, the money in the trust would be excluded from any calculations for IHT.

The same may apply to someone who pays for care for their elderly parents. If they shifted the capital to the parents as a lump sum, there would again be an immediate exclusion from IHT. If this is not done via a trust, it must be recorded in some other way, for example by keeping an exchange of letters about the subject and lodging a copy with the will’s executor.

For more information on trusts, please contact us.

 

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