The Complex World of Trusts: Navigating the Rules to Shield Assets

The moderately wealthy can effectively use trusts to shield their assets from inheritance tax, but the rules are complex and can backfire if not followed carefully. The interest in trusts has surged since the announcement that most pension pots will be included in an estate for inheritance tax purposes from April 2027. Lawyers and accountants report that their clients are increasingly concerned about a further raid on their estates by the chancellor, and trusts are featuring prominently in these discussions. When used correctly, trusts can reduce inheritance tax bills or avoid them altogether, make provision for family members, and help with estate planning. However, the rules are intricate, and a recent high-profile case demonstrates the potential pitfalls.

Key Takeaways:

• There were 733,000 active trusts and estates listed with the Trust Registration Service in August 2024, a 16% increase from the previous year.
• There are two main types of trusts: bare and discretionary. Bare trusts are the most straightforward but offer less flexibility, while discretionary trusts allow for more control but can be more complex.
• Trusts can be used to reduce inheritance tax by allowing assets to be considered outside of the donor's estate, but the rules are strict on who can still benefit from the property.
• Assets in a discretionary trust can remain there for 125 years, but HMRC charges inheritance tax at 20% on any assets above the £325,000 tax-free allowance and a further 6% every 10 years.
• If a benefactor dies within seven years of putting assets in a discretionary trust, inheritance tax of up to 40% will apply on anything above the allowances.
• Capital gains tax can be levied on assets given away outside of a trust, and the gain will be calculated from the point of purchase, not when the asset is put into a trust.
• There is no minimum amount to invest in a trust, but set-up and running costs can range from £5,000 to £12,000, with ongoing fees of £3,000 to £5,000 per year for professional trustees and £500 to £800 per year for non-professional trustees.

Statistics:

• 733,000 active trusts and estates listed with the Trust Registration Service in August 2024 (up from 633,000 the previous year).
• 16% increase in the number of active trusts and estates since the previous year.
• £5,000 to £12,000: range of initial professional fees for setting up a trust.
• £3,000 to £5,000 per year: ongoing fees for professional trustees.
• £500 to £800 per year: ongoing fees for non-professional trustees.

Sources:

• "Trust Registration Service" (August 2024)
• Quarmby, James (Stephenson Harwood law firm)
• Griffin, Rachael (Head of Tax and Trusts, Quilter wealth manager)