| The
Benefits of Assets held in Trust
We still believe that discretionary
trusts have a vital role to play in estate planning during your lifetime and on
first and second death. This is based on the following points that apply to assets
held in trust;. - All
growth on these assets is outside of your estate for IHT purposes.
If
assets up to the nil rate band are placed into trust on first death and it grows
in line with the increase in the IHT threshold then the same proportion of the
total estate will be free from IHT. However at the 10 year anniversary of the
trust there will be a 6% charge on any assets over the nil rate band at that time.
This is known as the Period Charge.
If these assets are passed on to the
surviving spouse then any growth beyond the double nil rate band will be in their
estate which will increase the IHT liability on their death. The tax charge is
40%.
- Any capital
gain (growth) on property from the time that it is placed in trust should be taxed
at 28% when it is sold (with effect from 6 April 2011) in line with recent legislation.
If this property had not been placed in trust then any growth could be subject
to 40% Inheritance Tax as it is growing within your estate
As of 6th
April 2008 any Capital Gains Tax payable is now at a flat rate of 18% and this
change will also apply to any capital gains tax payable by discretionary trusts.
Where
an estate is over a certain size i.e. already subject to Inheritance Tax, any
further growth in the estate will of course be subject to IHT at 40%. In the scenario
where the trust has not been utilised and the asset that would have been conveyed
into the trust was property you will be paying 40% tax instead of 18% on any growth,
plus 6% periodic charge (at the 10 year anniversary) i.e. 24% compared to almost
double that.
- These
assets are not counted as part of the surviving spouse's estate for later life
care means testing.
If all assets are passed to the surviving spouse
and later life care becomes an issue then this could have huge financial implications.
This
also applies to any assets placed into trust during your lifetime.
- These
assets are free from Inheritance Tax (IHT) for the trust period i.e. up to 125
years, if kept below the prevailing nil rate band on each 10th anniversary.
One
would hope that their children will be in the position to fully utilise their
own nil rate bands. Any assets that pass directly into their estates will therefore
simply be increasing the IHT that their children, your grandchildren, will have
to pay.
Assets passed to your children / grandchildren in trust are available
to them but are outside of their estates.
- These
assets can be protected from any divorce proceedings that your children / beneficiaries
may be involved in.
- These assets are protected
from bankruptcy proceedings that your children / beneficiaries may be involved
in.
- These assets are immediately available
to the beneficiaries to pay any outstanding Inheritance Tax liability on second
death.
- These assets can be accessed by the
surviving spouse after first death, as you are both beneficiaries of each others
trusts.
- Where an estate
includes a second property - gifting a proportion of this property to trust can
reduce the IHT liability on your estate in two ways.
i) The 7 year
rule.
ii) HMRC discount on jointly owned assets for IHT purposes by up to 15%.
- If you have remarried
or may remarry in the future following the death of a spouse, utilising discretionary
trusts can achieve greater IHT savings and ensure that the destination of those
assets is your children.
Assets can
also be placed into your LATESS Trust during your lifetime to reduce / eliminate
any Inheritance Tax on your estate and once in trust these assets will of course
also benefit from the above points. This currently applies to estates worth more
than £624,000. Another important point
to bear in mind is that it could be a mistake to rely on what could be very unreliable
legislation that could change at the whim of the current or future governments. |
