Using a trust to cut your Inheritance Tax

Money Advice Service

When you put money or property in a trust, provided certain conditions are satisfied, you don’t own it any more. This means it might not count towards your Inheritance Tax bill when you die. This guide explains the ins and outs of using a trust to cut your Inheritance Tax.

What is a trust?

A trust is a legal arrangement where you give cash, property or investments to someone else so they can look after them for the benefit of a third person.

So, for example, you could put some of your savings aside in a trust for your children.

There are two important roles in any trust that you should understand before you read on.

  • The trustee is the person who owns the assets in the trust. They have the same powers a person would have to buy, sell and invest their own property. It’s the trustees’ job to run the trust and manage the trust property responsibly.
  • The beneficiary is the person who the trust is set up for and is usually unable to manage the trust assets for themselves because they are too young or they are not good at managing their own money. The assets held in trust are held for the beneficiary’s benefit.

What does a trust do?

Take advice

A trust can be a good way to cut the tax to be paid on your inheritance, but you need professional advice to get it right. Always talk to a solicitor/independent financial advisor.

If you put things into a trust then, provided certain conditions are met, they no longer belong to you.

This means that when you die their value normally won’t be counted when your Inheritance Tax bill is worked out.

Instead, the cash, investments or property belong to the trust. In other words, once the property is held in trust, it’s outside anyone’s estate for inheritance tax purposes.

Another potential advantage is that a trust is a way of keeping control and asset protection for the beneficiary; a trust avoids handing over valuable property, cash or investment whilst the beneficiaries are relatively young or vulnerable.

The trustees have a legal duty to look after and manage the trust assets for the person who will benefit from the trust in the end.

When you set up a trust you decide the rules about how it’s managed. For example, you could say that your children will only get access to their trust when they turn 25.

What types of trust are there?

There are several types of trust.

Setting up a basic trust might have minimal cost. Whilst others are more complex to set up and would require more specialist advice, resulting in a more substantial cost.

Some trusts are subject to their own inheritance tax regimes. So when the assets have successfully been transferred into trust, they are no longer subject to Inheritance Tax on your death.

Others pay income and capital gains tax at higher rates, so it is important to know what type of trust you have.

The kind of trust you choose depends on what you want it to do. Here are some of the most common options:

  • Bare trust – this is the simplest kind of trust. It just gives everything to the beneficiary straight away as long as they’re over 18.
  • Interest in possession trust – the beneficiary can get income from the trust straight away, but doesn’t have a right to the cash, property or investments that generate that income. The beneficiary will need to pay income tax on the income received. You could set up this kind of trust for your partner, with the understanding that when they die the investments in the trust will pass to your children. This is a popular trust structure used in the will of a person who remarries after divorce, but has children from the first marriage.
  • Discretionary trust – the trustees have absolute power to decide how the assets in the trust are distributed. You could set up this kind of trust for your grandchildren and leave it to the trustees (who could be the grandchildren’s parents) to decide how to divide the income and capital between the grandchildren. The trustees will have the power to make investment decisions on behalf of the trust.
  • Mixed trust – combines elements from different kinds of trusts. For example, a beneficiary might have an interest in possession (ie, a right to the income) of half of the trust fund. The remaining half of the trust fund could be held on discretionary trust.
  • Trust for a vulnerable person – if the only one who benefits from the trust is a vulnerable person (for example, someone with a disability or an orphaned child) then there’s usually less tax to pay on income and profits from the trust.
  • Non-resident trust – a trust where all the trustees are resident outside the UK. This can sometimes mean the trustees pay no tax or a reduced amount of tax on income from the trust.

Want to set up a trust?

You can set up a trust right now or write one into your will.

When you set up a trust you need to clearly state:

  • what the assets of the trust are
  • who the trustee and beneficiaries are
  • when the trust becomes active – is it immediately, or only when you die?

When many people set up a trust in their will, they name the executor of the will as the trustee, but you don’t have to do this.

Read our guide on Choosing your executor

Need more advice?

Trust law is complicated and if you’re not careful you can walk into an immediate tax charge when setting it up.

To make sure you get things right, it’s vital to get professional advice before setting up a trust. Always talk to a solicitor or an independent financial advisor.

This article is provided by the Money Advice Service.

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Some important information about Rest Less Money

We want you to understand the positives, but also the limitations of using our site. We operate in a journalistic manner and therefore all information, guidance or suggestions provided are intended to be general in nature, and you should not rely on any of the information on the site in connection with the making of any financial decision.

When we set out to build Rest Less Money, we wanted to be a trusted place where you could find helpful information about financial matters affecting the over 50s. As a free to use resource, we try hard to provide the best information we can, but we cannot guarantee that we won’t occasionally make mistakes. So please note that you use the information on our site at your own risk, and we can’t accept liability if things go wrong.

Key things to remember when using Rest Less Money:

We do not offer financial advice – As a journalistic site, it’s important to know that we do not provide financial advice. You should always do your own research before choosing any financial product so that you can be certain it is right for you and your specific circumstances. If you are in any doubt, please seek professional financial advice from a regulated financial advisor.

No Liability – please note that you use the information on Rest Less Money at your own risk and we can’t accept liability for how you choose to use the information given on our site. We will often provide links to content or products and services available on other third-party websites. These are provided purely for your convenience and we cannot be held responsible for any content, or any of the products and services offered on any website that we link to.

 

Accuracy of Information – We try to make sure that all the information provided on Rest Less Money is correct at the time of publishing as we want it to be the most helpful resource possible. Sadly, we are not perfect however, and so we can make no guarantees as to the completeness, accuracy, adequacy or suitability of the information available on the site.
Whilst we work hard to try and provide accurate information, deals and prices can change, so whilst they may be correct at the time of writing, providers may subsequently decide to alter them later – so always double check first.

A final note on the Rest Less Community Forums – always remember that anyone can post their opinion on the Rest Less Community Forums, so it can be very different from our own opinion and may not be factual or well researched. Always be wary of any content posted on the forums and be sure to do your own research and due diligence on anything suggested. 

We hope you find Rest Less Money a useful resource and we would welcome your feedback at [email protected] on how to make it even better. For more information on any of the above you can read our full terms and conditions.

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