Inheritance tax: How you could slash IHT liability – ‘a number of tax advantages’

Inheritance tax labelled ‘unfair’ and ‘cruel’ by expert

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Considered one of the UK’s most hated taxes, more and more people are being dragged into paying it as the threshold has been frozen at £325,000 since 2009. Even more Britons are expected to pay it over the next few years as the threshold is going to remain frozen until 2026. That said, some may be able to increase the threshold. Britons are often told that planning is the backbone of an effective plan to minimise the inheritance tax liability. 

Jenny Holt, managing director for customer savings, and investments at Standard Life said: “Using a trust can allow you to support your children and grandchildren while you’re still around, as well as offering a number of tax advantages. 

“As a trustee, you retain an element of control over the funds and how and when they’re paid, while gifts made to the trust can reduce your estate for inheritance tax.”

A trust is a legal arrangement where a person can give cash, property or investments to someone else so they can look after them for the benefit of a third person.

The way a trust is taxed depends on what sort of trust it is.

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Discretionary gift trusts are the most popular type and is where a person gives their assets to the trust and a person can specify  how they would like them to be used for the beneficiaries and most importantly the trustees are free to act at their own discretion. 

Ms Holt added: “Using a discretionary trust gives grandparents the greatest flexibility and control, but the taxation is higher and more complex.”

For this trust, people will normally pay inheritance tax at a rate of 20 percent when setting up a trust if it’s in excess of the nil-rate band of £325,000.

On top of the tax paid when setting up the trust, there’s also a tax charge on assets in trust every 10 years afterwards. 

This is levied on the value of the assets at the time, after deducting the £325,000 inheritance tax allowance.

After that, a six percent charge is levied on the value of the total assets, less than the allowance.

Finally, inheritance tax will need to be paid again when the trust is closed, or if assets are removed.

There are multiple types of  trusts can go for and the four most common types are the Bare Trust, Loan trusts, and Discounted gift trusts. 

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However, there are many more options available to Britons. 

Bare trusts are considered simple trusts used to hold assets on another person’s behalf until they choose to take ownership.

These types of trusts don’t usually follow typical inheritance tax rules as they can be treated as “potentially exempt transfers”. 

Loan trusts are usually used to limit future gains in the value of a person’s estate as the assets in the trust has been “lent” meaning that they still form part of a person’s estate. 

However, the investment returns from the assets remain in the trust, and fall outside a person’s estate for tax purposes. 

Discounted gift trusts are usually used to hold insurance bonds and allow a person to receive income for up to five percent each year, 

This sits outside a person’s estate and transfers to the beneficiaries when they die. 

Some trusts will need to be registered with Her Majesty’s Revenue and Customs (HMRC) in order to comply with anti-money-laundering requirements or it becomes liable for other taxes. 

Ms Holt axplained that because the tax on trusts can be quite complicated, Britons should approach legal experts to explore their options when setting one up. 

She said: ““There are many tax-efficient ways you can support your loved ones and being well-informed about the options for your family’s circumstances will put you in the best position to make the most of your money, and their future. However, it is a complex area.

“You should really seek financial advice if you are considering using a trust to help you select the right option for your circumstances.”

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