Inheritance tax is a topic that often weighs heavily on the minds of individuals seeking to pass down their hard-earned wealth to their loved ones. In this article we explain choosing between a discretionary trust and an Employee Benefit Trust for your Family Investment Company (FIC)shares. We'll delve deeper into this subject and explore the considerations that can help you make an informed decision.
Understanding the basics
Before we dive into the details, let's clarify what these trusts are:
Discretionary Trust: A discretionary trust is a common choice for individuals with smaller investments, typically valued at between £250,000 to £325,000. It offers simplicity and cost-effectiveness during setup. However, for larger investments, there will be significant negative tax implications.
Employee Benefit Trust (EBT):An Employee Benefit Trust, on the other hand, is a more specialized option. It has no limit on the amount of money you can place in it. For investments or other assets valued well over £325,000 (the inheritance tax threshold) held in a FIC, EBTs can provide unique advantages.
Factors to Consider
The choice between these two trust types hinges on several factors:
FIC Value : If your FIC is relatively small, a discretionary trust may suffice. However, for larger FICs, a discretionary trust could incur a 20% tax charge immediately, followed by a 6% periodic charge every ten years on the value exceeding £325,000.
EBT Advantages : EBTs have no limit on the amount of money they can hold, making them a viable choice for substantial FICs. Importantly, EBTs are not subject to the periodic charge, a significant advantage for those with high-value assets.
Capital Gains Tax : In discretionary trusts, capital gains tax is payable by the trustees, which may lead to tax liabilities in the future. In contrast, EBT shares are encumbered on the original settler, meaning that when the settler passes away, the capital gains tax dies with them.
Long-Term Planning : With EBTs, you can simply place your capital shares in the trust and leave them until your passing. At that point, the EBT can transfer the shares to your beneficiaries, often your children or loved ones.
In the realm of inheritance tax planning, the choice between a discretionary trust and an Employee Benefit Trust can significantly impact your financial legacy. While discretionary trusts offer simplicity and cost savings for smaller FICs, EBTs emerge as the preferred choice for larger estates. They allow for unlimited assets, provide tax advantages, and ensure that capital gains tax liabilities are extinguished upon the settler's passing.
Inheritance tax planning is a critical aspect of securing your family's financial future. Making informed choices about trusts, such as whether to opt for a discretionary trust or an Employee Benefit Trust, can make a substantial difference in the legacy you leave behind.
Ultimately, the decision between these two trust types should be made with careful consideration of your specific circumstances. It is advisable to seek experienced advice when navigating the complexities of inheritance tax planning. Bluebond offers expert guidance in this area. If you're uncertain about the best course of action for your FIC shares, don't hesitate to reach out for professional assistance.