Thirsk Winton LLP

Trusts and IHT Mitigation

People often wonder whether it would be appropriate for them to transfer some of their assets into a Trust for the benefit of their dependents so as to mitigate Inheritance Tax that would otherwise be payable on their death.  There are two types of Trusts commonly used: Interest-in-Possession Trusts and Discretionary Trusts.

Interest in Possession Trust

This directs the Trustees to make payment of income and capital to named beneficiaries.  They must hold the assets for those beneficiaries and there is no discretion.  The object of the Trust is absolutely entitled to the income, and in some cases capital, which is not always a good thing if other issues later arise such as bankruptcy and council care charges.

Discretionary Trust

Under a Discretionary Trust the Trustees have the complete discretion to pay the income and capital to a named class of beneficiaries, but are under no obligation to any of those beneficiaries who are not able to insist on payment being received.

There are various implications involved in both types of Trust:

  • The transfer from the donor/settlor into the Trust is a lifetime gift and to avoid Inheritance Tax there must be survivorship for 7 years.
  • If the transfer into a Discretionary Trust exceeds the then current Inheritance Tax threshold, there can be a lifetime Inheritance Tax charge at the “Lifetime Chargeable Transfer” rate of 20%.
  • Income received by the Trust will be taxed at the Trustee rate of 50%, but it can be reclaimed by beneficiaries depending on their personal circumstances.
  • Proper trust accounts must be kept, and annual returns of income made to HMRC.
  • The transfer of any property into a trust will be a deemed disposal of that property at market value for capital gains purposes, although rollover relief may be available.

We can help advise you whether or not a trust of some sort might be a good idea, and if you decide to proceed, prepare the documentation.