Category: Blog

How Trusts Can Be Used to Minimise Tax Liabilities 

Trusts are an important part of estate planning because they not only provide protection over assets and control over succession, but they can also be used for their potential tax advantages.

What is a Trust?

A trust is a legal arrangement where the Settlor transfers assets to the Trustees, who then manage them on behalf of the Beneficiaries. Once assets are placed into trust, they belong to the trust, meaning they no longer form part of the settlor’s personal estate. This means that it may be possible to reduce the overall value of the estate for inheritance tax purposes, potentially saving thousands of pounds. However, it is crucial that the planning is carefully considered.

Trusts have wider benefits aside from potential tax advantages, they can provide protection from various risks such as claims against an estate, divorce and to assist with vulnerable beneficiaries.

Trusts can be created during the settlor’s lifetime, or through their Will and there are different types of trusts which can cater to varying circumstances.

Types of Trust Used in Tax Planning

Bare Trusts – This is the simplest type of trust and is commonly used to hold money for children until they are old enough to manage it themselves. The tax responsibility usually falls to the Beneficiary of the Bare Trust, i.e., it is treated as though they had earned that money themselves.

Discretionary Trusts – This is a more complex type of trust offering the Trustees discretion over how and when Beneficiaries receive income or capital. These types of trust are subject to a specific tax regime, incurring entry, anniversary and exit charges. However, where timed and planned correctly they can be used in a tax efficient way.

Interest In Possession Trusts – These are commonly used to provide income to an initial Beneficiary for their lifetime. However, the ultimate Beneficiaries are entitled to the capital when the trust ends. Although the trust assets may still be subject to inheritance tax in some circumstances, the benefit of these trusts is that the Settlor can protect the capital for future Beneficiaries whilst still providing an income to their spouse or civil partner.

Lifetime Trusts

Any of the above trusts can be created during the Settlor’s lifetime or through their Will and when the trust is created can affect how they are taxed. Lifetime trusts are created by the Settlor during their lifetime and, providing certain conditions are satisfied, the assets which have been transferred into the trust may not be included within their estate for the purposes of Inheritance Tax when they die. If you are considering creating a Lifetime Trust then it is important that you speak with a Solicitor who will review your circumstances and help you determine whether this arrangement is suitable for you. 

Final Thoughts

Trusts can be a good way of minimising overall tax liabilities when combined with careful planning and consideration. If you would like to discuss Estate Planning and Trusts and how we may be able to help, please give our friendly team a call on 0116 212 1000 or 01858 445 480 or complete our Contact Us form.