You may wish to safeguard your estate from inheritance tax, to ensure you can financially provide for your loved ones, after you pass away. You can utilise legal vehicles called trusts strategically for this purpose. Turner Little explains how to use trusts for inheritance tax planning purposes.
Inheritance tax
The UK government charges a 40% inheritance tax if the value of your estate eclipses the inheritance tax threshold (currently £325,000). As an example, let’s say that you wish to include a property in your estate. The average value of UK property currently stands at £232,885 but can climb much higher in cities, reaching £484,716 in London. Therefore if you put a London-based property, worth this average value, into your estate, it would be liable to pay nearly £64,000 in inheritance tax on this asset.
There are a number of ways to mitigate against inheritance tax. You should write a will, otherwise relatives who are not covered by the rules of intestacy could be required to pay inheritance tax on any assets they inherit from your estate. You could also donate at least 10% of the net value of your estate to charity, potentially benefitting from the reduced inheritance tax rate of 36%. We would advise you to consider placing assets, especially property, into a trust, to avoid paying inheritance tax.
Utilising trusts
You can use trusts to manage assets more effectively. When you create a trust you (the settlor), transfer the legal ownership of the assets contained within to trustees, who are responsible for managing them. The trustees ensure that the benefits derived from these assets e.g. rental income from property, reach the people you wish to receive these benefits, aptly called “beneficiaries.”
In some cases, by placing assets in a trust you shield them from inheritance tax. This is because you do not legally own these assets, so they cannot be counted towards the value of your estate for inheritance tax purposes. However, inheritance tax may be due when the assets are placed in a trust, when the vehicle reaches a ten year anniversary or the assets are removed from the trust. Also each asset in a trust has its own legal identity, so some of them may be liable for tax, while others may not.
Excluded property
We should note that you can exclude property from inheritance tax obligations in some circumstances. This applies, for example, if the property was transferred to a trust during your lifetime. However, the excluded property is not actually exempt from inheritance tax itself in some cases, such as for interaction and grossing up purposes. This deduction depends on the title and nature of the property, where it is located, the identity of your beneficiary and your beneficiary’s residence or domicile.
If the property is located in another country, the deduction will depend on your domicile when you originally placed it into a trust. Furthermore, there are extra considerations to take into account, if you place your assets into a non-resident trust. In this case, you and/or your trustees do not live in the UK, meaning that your estate still may be liable to pay inheritance tax on these assets.
Expert advice
You should remember that British trust law is fairly complex. If you wish to utilise trusts for inheritance tax purposes, you should enlist the aid of legal experts, to ensure that you can use these vehicles to mitigate your estate’s inheritance tax obligations. As experts, Turner Little can provide you with advice on setting up trusts, ensuring that you can utilise these vehicles for inheritance tax planning.
Turner Little
Turner Little was founded in 1998 and it has since become a well-established UK based professional Company Registration Agent, Registered Bank Intermediaries and Business Consultants, as well as Trust provider. You can receive our monthly newsletter by signing up using the form below.
