People often wonder whether it would be appropriate to transfer some of their assets into a trust for the benefit of their dependants, to mitigate inheritance tax or to protect assets for the next generation. The two most common types of lifetime trust are described below.
Interest in possession trust
This directs the trustees to pay the income, and in some cases capital, to named beneficiaries. The trustees must hold the assets for those beneficiaries and have no discretion as to who benefits.
Discretionary trust
Under a discretionary trust the trustees have complete discretion to pay income and capital to any of a named class of beneficiaries, but are under no obligation to pay anything to any particular one of them. This flexibility is useful where circumstances may change or a beneficiary is vulnerable.
Implications to consider
- The transfer from the settlor into the trust is a lifetime gift. For it to fall outside the settlor’s estate for inheritance tax, the settlor must survive for seven years.
- If the value transferred into a discretionary trust exceeds the settlor’s available inheritance tax nil-rate band, there is an immediate lifetime charge at 20%, and the trust is subject to periodic and exit charges thereafter.
- Income received by the trust is taxed at the trust rate (currently 45%, or 39.35% for dividends), although beneficiaries may be able to reclaim tax depending on their own circumstances.
- Proper trust accounts must be kept, the trust must be registered with HMRC’s Trust Registration Service, and annual tax returns made.
- The transfer of property into a trust is a deemed disposal at market value for capital gains tax purposes, although holdover relief may be available in some cases.
We can advise you on whether a trust of some kind might be a good idea and, if you decide to proceed, prepare the documentation and advise the trustees on their ongoing duties. Where specialist tax advice is needed we work with accountants and tax advisers we know well.