Many individuals uncertain of the usage of the asset by the next generation set up a trust. The next generation transfers the ownership from the trust builder to the new trust owner. It reduces inheritance tax for the original owner. It is ideal if you do not want your beneficiaries to pay inheritance taxes on the assets after death. Paying inheritance tax reduces the overall asset or inheritance value that beneficiaries receive.
The blog explores inheritance tax and how to set up a trust to avoid it. Let’s first begin with the basics.
What does inheritance tax imply?
They impose an inheritance tax on the property of the dead. The authority deducts it as a part of the administration process. However, in certain exceptions, the authority may levy a tax on assets during a person’s lifetime. Precisely, he only taps the person for inheritance tax if the estate and property value exceeds the £325,000 mark.
However, one must not pay inheritance if the deceased leaves everything above that threshold (£325,000) to:
- The deceased partner’s spouse or civil partner
- A charity
- An amateur sports club
Moreover, the threshold increases to £5,00,000 if the deceased person’s primary home becomes the home of the grandchildren or his children legally.
Thus, while transferring the assets, creating a trust or writing a will, consider these aspects. According to the standard inheritance taxation regime, you must pay 40% of tax on the value of estate and property above £5,00,000.
What could be the possible reasons to set up a trust?
A trust is an indirect arrangement where you give away the assets indirectly. There will be a beneficiary or beneficiaries over the trust. However, the trustee manages and runs it legally. It acts as a third party on the trust. The trustee shares the same powers as the legal owner of assets. The beneficiary is the person who should benefit from the asset held.
Apart from reducing the inheritance tax liabilities, there are other reasons setting up a trust can help:
- Grandparents set up a trust to save money for grandchildren with their parents as trustees. In this way, the beneficiaries will own large cash sums by the time they mature and sound enough to make financial decisions.
- Another reason to convert the wealth into assets as trust is to manage money better after retirement. It is especially ideal for individuals having health issues or undergoing disability.
What are the types of trusts to consider?
There are different types of trusts to consider. However, over some, you must pay inheritance tax. Or there exist some possibilities of you paying tax or a part of it on some trust types:
| Trust Type | Implication | The possibility of an inheritance tax |
| Interest in Possession trust | The trustee must distribute all the assets or income to the beneficiary. | The trust exempts a person from inheritance tax liabilities if he transfers the assets into the beneficiary’s name by 22nd March 2006. Post that, he would be liable for inheritance tax. Moreover, he then has to pay 10 years of tax charges. |
| Bereavement trust | A bereaved trust is for the minor who has lost his parents | Here, the authority may not charge inheritance tax only if:
· The assets are set aside just for the minor · They become fully entitled to assets by the age of 18. |
| Non-resident Trusts | This is a trust where trustees live in the UK but are non-residents | A deceased person’s estate must be calculated by determining whether they made 7 years before death. If they paid 20% inheritance tax, you will have to pay 20% more from the estate. |
How to set up an inheritance tax trust fund?
It is important to have a clear overview before setting up a trust fund. You can get help from expert trust establishment advisors. They will advise you to accord to the present, future and complete financial structure. It would help you know whether it would be right in the first place to have a trust or not. Or, if you want to do it yourself, here is what you can do:
1) Analyse your assets
Analyse the total valuation of the assets you want to dedicate towards the trust. It is a one-time investment and analysis. It will help save time.
2) Decide the trustees
Next is- deciding the name of the trustees on the assets. It is the most difficult part if you have too many dependents. You can shortlist the trustees by walking by two traits- sensibility and trustworthiness. He should be someone whom you can rely on for the advantage of your beneficiaries.
They should have the legal knowledge, can act in the best interest in financial terms, and can outlive you in expectations. You can add 2-4 trustees to the agreement. Alternatively, if you want to set up a trust in your will, you can name them as “reserve trustees”.
3) Distribute the share
It is the most important part of the inheritance tax trust fund. Moreover, it may take good time to dedicate the asset share accordingly or evenly to the beneficiaries. You can decide the share according to the above traits- sensibility and trustworthy personality. It eases up the deal for you.
4) Consult an expert if needed
If you struggle to follow the proceedings or need help with the document requirements, check the experts. He may help you with detailed guidance to create a hassle-free trust.
Costs associated with trust establishment and legalising
A lot of individuals believe they share no liabilities towards inheritance tax post having a trust. However, it is far from trust. Setting up a trust entails some costs, primarily known as charges. Here is what you must pay during trust establishment:
1. Entry charge
You must pay the entry charge when you transfer trusts to a trustee. You can transfer any asset or belonging that’s 100% yours, like a property, building, etc. It could be:
- A gift during the person’s lifetime
- A transfer reduces the value of the person’s estate. The loss to the person’s estate is known as a gift.
2. Exit charges on a trust
The exit charge is the same. However, one pays it only after the trustee pays out the trust to the beneficiary. The charge one pays is the percentage of the value of the transferred assets. In this case, the person or the owner (trustee) stays free from inheritance tax. Instead, the beneficiary receiving the trust will be liable for the inheritance tax.
3. Ten-year charge
The ten-year charge, known as the periodic charge, is payable when the trust contains a property of over £325,000, an inheritance threshold. The authority charges it on the net value of the property. Authority mandates it after every 10th anniversary.
They get the net value after deducting the debts and reliefs like business or agricultural property relief. However, these debts do not apply to assets on hold for just 2 years or fewer.
Alternatively, if all assets are transferred to one or more beneficiaries before the 10th anniversary, 10-year charges will not apply. He will only pay exit charges. Usually, the exit and 10-year charges are levied at 6%.
If you are fortunate even to skip the 10-year charge, you must pay exit one. Moreover, do so before the deadline to avoid any severe circumstances. If you lack financial flexibility, get no guarantor loans for bad credit on an instant decision from lenders. It would help you get the desired cash without bothering someone close. It is because, as a beneficiary, dealing with estate charges gets overwhelming. However, having relevant finances and credit can help you get instant cash to close the charges.
Bottom line
Planning the asset transfer is one of the trickiest parts. It is because one looks to do so without paying inheritance tax. If you, too, want your beneficiaries to skip that, the blog holds the key. You can see the best ways to set up a trust fund to avoid inheritance. Moreover, hire experts if you get stuck somewhere in the process.
