inheritance tax planning

How To Use Trusts In Inheritance Tax Planning

Linkilaw Record Keeping & Taxes

The Person Without Any Tax Planning Loses… Everyday Of The Week

Trusts have been a popular way to manage property and assets since the times of the Romans, and are considered a crucial part of clever tax planning.

Simply put, trusts are a way to separate the legal ownership and control of a property from its equitable ownership and its benefits. Trusts are often seen as a form of contingency measure: By using this legal figure, the settler (creator) of the trust grants that the benefits derived from selected property will go to the appointed beneficiaries.  

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Staying Ahead Of The Curve With Your Inheritance Tax Planning

As you may already know, inheritance tax in England is due at 40% on anything above the threshold of £325,000. Depending on where a property is located, this figure can be enough to avoid the tax, or either fall short. At a national level, the average price of real estate property currently stands at £232,885, but cities tend to be more expensive.

For example, the average price for London real estate stands at a whopping £484,716. Let’s imagine for a minute that you inherit the exact average London property; if that were the case, you’d be obliged to pay 40% of the value above the £325k threshold, which accounts for almost £64,000. Not exactly pocket change, chaps!

Inheritance tax may be due when:

  • Assets are put into the trust
  • The trust reaches a ten-year anniversary
  • Assets are taken out of the trust or the trust ceases

In trust law, each asset has its own separate identity. Thus, some assets can receive different tax treatment: for example, a trust can include a property for a disabled beneficiary. In such a case – and as long as the person making the transfer survives for 7 years after making the transfer – the inheritance tax will not apply. 

So you can see how this kind of tax planning is invaluable for asset protection.

Excluded Property For Tax Planning Purposes

In particular cases, property can be excluded from inheritance tax obligations. The exclusion applies to:

  • Property transferred in the lifetime,
  • owned by individuals at death, and
  • property held in a settlement

Excluded property is not exempt from inheritance tax, for example where grossing up or interaction is concerned. If you are dealing with a deduction for ‘excluded property’, your investigation will need to consider one or more of the following aspects:

  • The title to and nature of the property concerned.
  • The locality of the property.
  • The identity of the person beneficially entitled to the property.
  • That person’s domicile and/or residence, and
  • In the case of settled foreign property, the settlor’s domicile when he made the settlement.

In addition, non-resident trusts (whose trustees do not reside in the UK, or only some of the trustees are resident in the UK and the settlor of the trust isn’t) may have to pay inheritance tax on its assets.

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Getting Professional Advice For Your Tax Planning: Highly Recommended

As you can see, trusts are a complicated subject when it comes to taxation and tax planning. Not only do different types of property are due to be treated differently, but there are several kinds of trusts: bare trusts, accumulation trusts, mixed trusts, interest in possession trusts, discretionary trusts, settlor-interested trusts and non-resident trusts.

Circumstances and other factors also play a part when it comes to inheritance tax, so seeking advice is always recommended when dealing with trusts. Prior to this, you will find more useful information on the subject here, and also here.

If you’d like to find out more about appropriate inheritance tax planning specific to your circumstances then speak with one of our legal experts.