According to estate planning experts, trusts are becoming more and more popular as a means of avoiding inheritance taxes
We examine what trusts are and whether you should use them.
There has been a surge in inquiries regarding the use of trusts to safeguard wealth due to the government's plans to make inheritance tax due on pensions and other changes to IHT regulations. In what ways can trusts help you avoid paying more taxes than necessary?
Legacy wealth planning is getting harder as inheritance tax (IHT) is going to be applied to pensions starting in April 2027 and 100% business and agricultural property relief will be eliminated starting in April 2026.
Trusts, which are a means of ringfencing assets, are becoming more important in financial plans as more people reevaluate how their wealth is set up for future generations.
According to wealth manager Quilter, the number of trusts established in 2024 increased by nearly 200 percent over 2023, and as more people look to evade inheritance tax, uptake in 2025 is already expected to significantly exceed this level.
We go over what trusts are and how you can use them to lower your inheritance tax liability and plan your finances.
A trust: what is it?
Jude Dawute, managing director of financial advising firm Benjamin House, defined a trust as "a legal arrangement where assets money, property, and investments are passed to trustees, who look after them on behalf of beneficiaries."
"It's a helpful method to manage the timing and manner of wealth transfer, safeguard assets, and lower inheritance taxes," he continued.
Trusts distinguish between the beneficial and legal ownership of an asset. In actuality, this means that the settlor, trustee, and beneficiary are the three parties that are always involved in a trust.
A settlor is a person who transfers assets into a trust. A will trust can be established in response to death via a valid will, or it can be established during their lifetime (a lifetime trust).
By arranging the assets in this way, the original owner may cede some of their rights and assign authority to a trustee while they are still alive. But there are other ways they can take much more control.
Years into the future, a settlor can project their desires. If a trust is properly established, you can fairly precisely decide who gets what and when. Trustees may be professionals who work for a trust company or any other qualified individual who is willing to assume these duties.
The trustee is the trust's legitimate owner and is empowered to manage and oversee its assets.
The individual who genuinely gains from the trustwhether through its use, income, or sales proceedsis known as the beneficial owner.
What is the purpose of using a trust?
There are several benefits to trusts, chief among them being the following.
To protect wealth across generations, to avoid probate delays, especially when life insurance payouts are involved, to control who receives money and when, especially if children or vulnerable beneficiaries are involved, and to keep assets outside of your estate to avoid inheritance tax. According to Liam Chapman-Lyes, senior paraplanner at Succession Wealth, "trusts are an effective estate planning tool that offer flexibility and control over asset distribution."
"If properly set up, they can handle a range of situations and needs, guaranteeing that your legacy is handled in accordance with your desires for a very long time.
There exist several varieties of trust. They're the most prevalent.
Spousal bypass trusts prevent lump sums, such as death-in-service payouts, from inflating the estate of a surviving spouse; bare trusts are the most basic type of trust, in which assets are held in the trustee's name but they do not have any discretion over the assets held in trust; and discretionary trusts are the most flexible, giving trustees the freedom to choose when and how to distribute funds.
Getting around inheritance tax by using a trust.
Given that inheritance tax revenues are steadily increasing, inheritance tax is the Treasury's constant gift.
At the moment, 40% is the inheritance tax rate. This is payable on any amount over the nil-rate band, which is the 325,000 threshold. But you also receive a residence nil-rate band if you own a home. This is 175,000 at the moment.
Therefore, before inheritance tax is applied to your estate, you may have a personal threshold of £500,000. Married or civilly partnered couples are able to leave up to one million to their direct descendants.
For the part of your estate that surpasses this limit, using trusts can help you lower your tax obligations.
IHT is still primarily a discretionary tax, even though the trend is only going upward, according to Stacey Love, technical manager, tax, trusts, and estate planning at Canada Life. Depending on how the different exemptions are applied, many estates might not be required to pay any IHT at all.
Trusts can be established in a few ways to help your loved ones and avoid paying inheritance taxes. However, you'll typically want to consult a specialist, such as an accountant or financial advisor, for assistance.
Dawute provided three real-world examples of how he helps clients lower their inheritance tax obligations by using trusts.
1. A discretionary trust that offers life insurance
"Most clients are unaware that life insurance becomes part of the estate if it is not written into trust, which can result in delays through probate and 40 percent inheritance tax," Dawute said.
IHT is avoided, the money is paid promptly, tax-free, and outside the estate by putting it into a discretionary trust.
However, transfers into a discretionary trust may be subject to an entry charge, which is a 20 percent immediate charge on the excess amount if the transfer exceeds your available inheritance tax nil rate band.
2. Trusts with bonds both offshore and onshore
When clients sell their businesses or receive sizable lump sum payments, Dawute occasionally suggests using investment bonds as a tax-efficient way to increase their wealth. Inheritance tax can be avoided by putting those bonds into a trust.
"Over time, it can help the family by protecting the capital from future IHT charges or by frequently transferring segments to children at lower tax rates," he said.
3. Death-in-service benefits through spousal bypass trusts
Although death-in-service benefits are frequently disbursed outside of the estate, if the spouse receives the money directly, it becomes a part of their estate and might be subject to taxes upon their death.
Dawute noted, "A spousal bypass trust allows the surviving spouse to benefit from the money while keeping the lump sum out of both estates."
Recently, he worked with a client who had a death-in-service benefit of £500,000. Their spouse's estate would have increased to £1.25 million if this had been paid to them directly.
This would have resulted in a 200,000 IHT bill later on, considering the 40% inheritance tax rate. "The payout was safeguarded and the family's wealth was preserved for future generations by using a spousal bypass trust," he said.
Trustee's role.
Trustees may be charged with a wide range of duties and responsibilities, such as paying taxes and employing legal and investment management experts.
In the event that the trust is discretionary, which means it has the authority to decide how to divide its assets, it may also need to decide how to spend its capital and/or income.
Because of these factors, many people would rather have their trust managed by experts, who would then receive yearly fees from the trust's assets.
Others who want to organize family wealth, however, might designate a mix of family friends and professionals as trustees in order to strike a balance between objectivity and intimate familiarity with the needs and circumstances of the beneficiaries.
The seven-year rule.
The full 40 percent inheritance tax will be due from your estate if you pass away within seven years of transferring assets into a trust.
This is in lieu of the reduced 20 percent that is due when the transfer is made while you are still alive, unless there was no inheritance tax owed (IHT may be due, for instance, if you were transferring money into a discretionary trust that was above your nil rate band).
If there was no inheritance tax owed at the time of the transfer but you pass away within seven years of the transfer, the transfer's value is added to your estate when determining whether inheritance tax is owed.
For instance, if you give away your house but keep living there, you will be required to pay 20% of the transfer fee, and the gift will still be considered part of your estate, even if you make a gift into a trust and continue to benefit from it. These are referred to as gifts with a benefit reservation.
Trusts' benefits and drawbacks.
When it comes to financial planning, trusts have the following primary benefits.
They prevent wealth from leaving your estate for the purposes of IHT planning, assist in the safe and gradual transfer of wealth, help you avoid probate, and facilitate multigenerational financial planning. However, these are the drawbacks.
If not set up correctly, they can be complicated; trustees have legal obligations; certain trusts may need to be registered or report taxes; and once the money is in a trust, you cannot access it directly.
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