Trusts have become very topical of late. More often than not, clients will have misconception that they have to have substantial assets to utilise a trust or become concerned about the legal confusion and administration that comes with it.
Don’t get me wrong, trusts are far from simplistic. However, they are a very powerful tool that can greatly help mitigate inheritance tax or “voluntary tax” as Sir Churchill labelled it. Trusts can be expensive and administrative not to mention confusing, but there is a reason they are still used to date. With inheritance tax currently sitting at 40% it doesn’t take much to consider the potential tax savings. When it comes to mitigating inheritance tax, you are limited on options and often forced to compromise on the solution, often limiting or removing control/access to your assets, taking higher levels of risk when investing or paying a premium on the outcome of your death.
Naturally the most simplistic solution is to gift money, after 7 years (unless within the annual gift allowances provided) these assets will fall outside of your estate. Most don’t like to do this as they worry what their children may do with a large windfall of cash, quite rightly so as you know them best!
An alternative could be to invest in Business Property Relief (BPR) qualifying products often EIS/SEIS. After being held for two years, these assets don’t fall outside of your estate but instead come with 100% discount on inheritance or 50% for certain assets. However due to the criteria on qualifying it often results in high risk investments as the companies that qualify are often young, small and less financially stable.
One solution could be to insure your life and place the proceeds in trust (to fall outside of your estate on death). The problem with this is you are unaware on when you will die resulting in the requirement for a Whole of Life policy to cover you for the whole of your life (Self-explanatory…) which comes at a cost as the event is inevitable. This cost as a regular premium could become unaffordable or the single premium solution could negate most of the benefit.
Trusts can help meet in the middle for most of these solutions. They can gift assets but retain control and access. They can remain invested under your discretion and still provide you an income as well as be earmarked for beneficiaries. Tax can be efficiently managed by opting for non-income baring assets to avoid the necessity to submit annual returns. Assets can be passed at your discretion not just on death allowing you to retain full control on when your beneficiaries benefit.
Education is key and clear objectives is essential. If you would like to know more about trusts, contact a local financial adviser!