Inheritance tax (IHT) is a tax on the estate of an individual who has passed away, including their money, possessions, and property It is often referred to as the “death tax” and is typically paid by the beneficiaries of the deceased person’s estate In the UK, the current threshold for paying inheritance tax is £325,000, although this can vary depending on certain circumstances However, there are ways to minimize the impact of inheritance tax on your estate, and one of these methods is through the use of trusts.
Trusts are legal arrangements that allow a person (the settlor) to transfer their assets to another person or group of people (the trustees) to hold and manage for the benefit of someone else (the beneficiaries) Trusts can be used for various purposes, such as protecting assets, providing for vulnerable individuals, or tax planning When it comes to inheritance tax, trusts can be a valuable tool for reducing the amount of tax that your heirs will have to pay on your estate.
There are several types of trusts that can be used to minimize inheritance tax liability:
1 Bare trusts: Also known as simple trusts, bare trusts are the most basic form of trust In a bare trust, the beneficiary has the absolute right to both the trust capital and income Assets held in a bare trust are treated as part of the beneficiary’s estate for inheritance tax purposes, so this type of trust does not provide any IHT advantages.
2 Discretionary trusts: In a discretionary trust, the trustees have the discretion to decide how the trust assets are distributed among the beneficiaries This flexibility can be useful for tax planning purposes, as the trustees can choose to distribute assets in a tax-efficient manner.
3 Life interest trusts: Also known as interest in possession trusts, life interest trusts give one or more beneficiaries the right to receive income from the trust assets during their lifetime Upon the death of the beneficiary, the trust assets are passed on to the remainder beneficiaries iht and trusts. Assets held in a life interest trust are not considered part of the beneficiary’s estate for inheritance tax purposes, potentially reducing the overall tax liability.
4 Charitable trusts: Charitable trusts are set up for the benefit of charitable causes and are exempt from inheritance tax By including a charitable trust in your estate planning, you can reduce the amount of tax that your heirs will have to pay.
By utilizing the various types of trusts available, individuals can effectively reduce their inheritance tax liability and ensure that their assets are distributed according to their wishes However, it is important to seek professional advice when setting up a trust, as there are complex legal and tax implications to consider.
In addition to using trusts, there are other ways to minimize the impact of inheritance tax on your estate One of the most common methods is through the use of lifetime gifts By gifting your assets to your heirs during your lifetime, you can take advantage of various tax exemptions and allowances, such as the annual gift exemption and the small gifts exemption This can help to reduce the overall value of your estate, therefore lowering the amount of inheritance tax that will be due upon your death.
Another effective strategy for minimizing inheritance tax liability is to make use of the residence nil-rate band This additional inheritance tax allowance applies when passing on your main residence to your direct descendants, such as children or grandchildren The current residence nil-rate band is £175,000 per person, and it is set to increase to £175,000 by 2020/21 By taking advantage of this allowance, you can potentially reduce the amount of inheritance tax that your heirs will have to pay.
In conclusion, inheritance tax and trusts are closely linked, and trusts can be a valuable tool for reducing the amount of tax that your beneficiaries will have to pay on your estate By utilizing the various types of trusts available and taking advantage of other tax planning strategies, you can ensure that your assets are passed on to your heirs in a tax-efficient manner It is important to seek professional advice when setting up a trust or planning your estate to ensure that your wishes are carried out and that your tax liabilities are minimized.