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Trusts and Its Effectiveness in Reducing Inheritance Tax | IHT Planning

Trusts and Its Effectiveness in Reducing Inheritance Tax | IHT Planning

How do Trusts Avoid Inheritance Tax? | How do Trusts Reduce Inheritance Tax?

Trusts and Its Effectiveness in Reducing Inheritance Tax | IHT Planning – Amongst the different ways discussed, a trust is usually the go-to method for high wealth individuals due to its flexibility and effectiveness to reduce tax.

As discussed in our previous article, although trusts can be used to reduce inheritance tax, it may still be subject to capital gains tax (CGT) and income tax. The overall tax liability should still be considerably less compared to paying the full 40% inheritance tax despite also paying these additional taxes. One of the main reasons to use a trust is to utilise the inheritance tax allowance of £325,000 every 7 years. A trust may continuously deduct its asset value for inheritance tax purposes every 7 years, as long as the transferor does not pass away.

In this article, we will be going through the top trusts used to reduce inheritance tax.

Trusts and Its Effectiveness in Reducing Inheritance Tax – Bare Trusts

A bare trust, also known as a simple trust or absolute trust, is a legally binding arrangement whereby assets (cash and non-cash assets such as properties) are held by a trustee (usually a parent or grandparent) for the sole benefit of a beneficiary (usually a child or grandchild). As soon as the beneficiary reaches the legal age of maturity (age 18 in England and age 16 in Scotland), he/she will have immediate and absolute rights to the assets within the trust – the trust will then come to an end. In order to reduce one’s inheritance tax liability, a Will planner should, therefore, set up bare trusts as early as possible to mitigate the risk of passing away within 7 years of the transfer.

Trusts and Its Effectiveness in Reducing Inheritance Tax – Discretionary Trusts

A discretionary trust appoints trustee(s) to decide whom pay outs are made to, the amount paid, when they are made and whether to impose conditions on the beneficiaries. This type of trust is popular when it comes to inheritance planning as it is not necessary to decide who and what/when the beneficiaries will get at the time of setup. The settlor (the person creating the trust) is only required to decide potential beneficiaries and who the trustees are. It is also possible to not name specific beneficiaries, but rather, to list the class of beneficiary instead (e.g. children, grandchildren etc.). The flexibility of this allows beneficiaries, who are not even born yet and thus covering different generations, to be included in the trust. Discretionary trusts can last up to 125 years, thus able to span over several generations within the family. Unlike the bare trust, a discretionary trust is subject to a chargeable lifetime transfer (CLT) immediately if the assets transferred into the trust (plus any other CLTs made within 7 years of the transfer) exceeds the inheritance tax allowance of £325,000. Such CLTs are charged at 20% initially. The trust will then be subject to a periodic tax charge on every 10th year anniversary – this is charged at a rate of 6% for anything above the inheritance tax allowance. It should be noted that, assuming the full inheritance tax allowance was utilised for the initial set up of the trust, the assets within the trust can have another £325,000 deducted after 7 years from the set-up date of the trust. This, therefore, means that the 10 yearly charge would be taxing anything over the £650,000 (assuming no other CLTs were done). Based on this, if an inheritance tax planner has significant amount of inheritance to pass on, it is advisable to set up a discretionary trust as soon as possible to make use of a £325,000 inheritance tax allowance every 7 years. Finally, there are exit charges for assets taken out of the trust if there was a CLT charge levied during the initial set-up of the trust, or if there was a 10 yearly charge levied on the trust. This exit charge amount is based on the following formulae:

Exit charge = amount of capital distributed x (last amount of tax paid on trust / value of the trust at inception OR the 10th anniversary) x α/40

Where α is the number of complete calendar quarters from inception OR from the last 10th anniversary.

The exit charge can only be up to 6% for any assets transferred out of a trust, whether they are cash or property.

Other Trusts

There are also other trusts to consider. The two that were mentioned are the most popular ones when it comes to inheritance tax planning. Different trusts include accumulation trusts, interest-in-possession trusts, mixed trusts, settlor-interested trusts, charitable trusts and trusts for vulnerable people. The latter two are also worthy of an honourable mention when it comes to taxes. Gifts to a charitable trust is free from capital gains tax, inheritance tax and are also generally free from income tax. Trusts for vulnerable people, also known as trusts for someone who is physically or mentally disabled or an orphan below 18 years old, are entitled to special treatment for tax purposes when it comes to income, capital gains and inheritance, if certain conditions are met.

Life Insurance Written in Trust

It is possible to take out a whole-of-life insurance for the potential inheritance tax bill. One should consider this if one is certain that they are over the inheritance tax-free threshold and are worried that their family may not be able to afford to pay the liabilities without selling any assets. A whole-of-life insurance, as it suggests in the name, is life insurance policy that is payable monthly until the death of the of policyholder. Whole-of-life insurances are generally more expensive compared to standard life insurances as there are no pre-set maturity dates on the policy – one should expect the insurance to be even more expensive to take out as the interested policyholder is older due to the risk involved. It is important that, to ensure the life insurance proceeds are outside of your estate, the policy must be written in trust. A whole-of-life insurance has two benefits. Not only would the proceeds be paid outside of your estate and would have thus avoided inheritance tax, the premiums paid for the policy will reduce the value of your estate, which would have further reduced your inheritance tax payable.

How can Auction Agent, your local property auction house, help you?

Whether you are looking to liquidate your property assets to transfer cash into a trust, looking to valuate and offload a probate property due to a death in your family or simply to invest into properties for rental income within a trust, Auction Agent is at hand to help with your property needs. We, Auction Agent, are experienced property auctioneers with extensive local property knowledge for your area. Auction Agent has unparalleled knowledge against their competitors when it comes to properties based in Burnley, Blackburn, Accrington, Rossendale, Nelson, Bacup, Rawtenstall, Blackpool, Clitheroe, Preston, Bury, Bolton and Lancashire. With our traditional auction method, Auction Agent can ensure that lots sold on our property auction platform will complete anywhere from as little as one day to an absolute maximum of 28 days. Auction Agent has a combined experience of over 50 years within the UK property market – we can most certainly answer any property questions you have, whether you are looking to sell a house, buy a property or just curious about property auctions in general. Auction Agent property auction house utilises all the leading online property portals including Rightmove, Zoopla, and PrimeLocation, as well as social media platforms like Facebook, Twitter, and LinkedIn, in order to maximise the exposure of your property to potential bidders. Furthermore, with our extensive database of cash-ready property investors, you can rest assured that your property will get all the attention it deserves from high-conversion buyer leads.

Let Auction Agent help you in dealing with your probate property today with our incredibly easy and convenient property auction selling process and buying processcontact us for an extensive probate property valuation report for your inheritance tax report to the HMRC.

Do you have a probate property near Turbary Woods Owl and Bird of Prey Sanctuary, Avenham and Miller Parks, Preston Guild Wheel, Brockholes Nature Reserve, Harris Museum and Art Gallery, Barton Brook Dairy, Cuerden Valley Park, Bowland Wild Boar Park, British Commercial Vehicle Museum, Beacon Fell Country Park, Preston Railway Station, Lancashire Infantry Museum, Ribchester Roman Museum, Preston Docks, St. Walburge’s Church, Deepdale Stadium, Claylands Park, Preston Guild Hall & Charter Theatre, The River Ribble, West Lancashire Railway, Preston Bus Station, Haslam Park, Fishergate Shopping Centre, Covered Market, Winckley Square Park, Beer Brothers Brewery, Miller Arcade, Giddy Kids, Stydd Gardens, Rufford Old Hall, The Walled Garden, The Barn, Leyland Market, Longton Brickcroft Nature Reserve, Withy Grove Park, Smithy Farm, Brindle Distillery, Hurst Grange Park, Moor Park, Preston Cenotaph, The Preston Martyrs Memoria, Lower Kem Mill, St. John’s Minster, Preston Minster, Preston Playhouse Theatre, Fishergate Bollard, Church Cottage Museum, St. Paul’s Warton, The Old Corn Mill Antiques Centre, St. George’s Shopping Centre, Preston City Trampoline Club, Ladyewell, St. John’s Shopping Centre, St. Mary’s Fernyhalgh, Barton Grange Garden Centre, The Flower Bowl Entertainment Centre, Monkey Magic, Brig N Barrel, Sweets & Treats, Cann Bridge Ale House, The Black Bull Inn, Northcote Cookery School, The Grapes, Stanley House Spa, The Bee Centre, Shores Hey Farm, Towneley Hall, The Singing Ringing Tree, Gawthorpe Hall, Turf Moor, St. Peter’s Church, Pendle Hill, Pendle Heritage Centre, Animal Quackers, Whalley Abbey, Liv Spa, Burnley Mechanics, Angel Inn, Reel Cinema, Rosehill House Hotel, Sparth House Hotel, Mercure Blackburn Dunkenhalgh Hotel & Spa, Astley Bank Hotel, Northcote Hotel, Woodland Spa, Helmshore Mills Textile Museum, Whitaker Museum, Grundy Art Gallery, The New Philly Family Bar, Escape Room Centre, Marton Mere Local Nature Reserve, Opera House & Winter Gardens, Dino Mini Golf, Ascent Trampoline Park, Blackpool Zoo, Fleetwood Market, Sandcastle Waterpark, Blackpool Pleasure Beach, Coral Island, Madame Tussauds Blackpool, Blackpool Tower, or Pine Lake Resort?

For a comprehensive probate property valuation on your inherited property in Bolton, Bury, Burnley, Blackburn, Accrington, Rossendale, Nelson, Bacup, Rawtenstall, Blackpool, Clitheroe, Preston, Lancashire or any other area in the BL0, BL1, BL2, BL3, BL4, BL5, BL6, BL7, BL8, BL9, BB1, BB2, BB3, BB4, BB5, BB6, BB7, BB8, BB9, BB10, BB11, BB12, BB18, BB94, PR0, PR1, PR2, PR3, PR4, PR5, PR6, PR7, PR8, PR9, PR11, PR25 or PR26 postcodes, contact Auction Agent today on 01706 940499, or visit

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