Using a Bare Trust to Avoid Inheritance Tax

Up until now, it has been relatively unusual for people to use Bare Trusts, as discretionary trust offers the trustees significantly more control over the trust assets.

Table of contents

Using a Bare Trust to Avoid Inheritance Tax

Let's discuss your Inheritance Tax issues with a Free Consultation

Up until now, it has been relatively unusual for people to use Bare Trusts, as discretionary trust offers the trustees significantly more control over the trust assets.

However, Bare Trusts are likely to make a comeback as the total value of Discretionary Trusts settled in a lifetime or on death is liable to a potential income tax charge on the tenth anniversary.

The main reason for the possible income tax charge with a Discretionary Trust is that the trust is only allowed a lifetime limit equivalent to the Nil Rate Band.  However, a gift into a Bare Trust is treated as a Potentially Exempt Transfer and so is essentially unlimited in the value that can be placed into it.

What is a Potentially Exempt Transfer?

Potentially Exempt transfer means the gift is still potentially liable to Inheritance Tax unless the person making the gift lives 7 years from the date of the gift. The amount of the gift can be unlimited and provided the settlor lives a full seven years after the gift no IHT will be due.

Further Advantage of the Bare Trust

A further advantage is that the trust has the full allowance benefit for Capital Gains Tax and not half the exemption as is applied to Discretionary Trusts.

Bare Trusts are partway between full trust and outright ownership.

The trustees have the usual trustee responsibilities, but for tax, the liability arises on the beneficiaries and not the trustees.

Why are Bare Trusts not used as much as Discretionary Trusts?

The reason Bare Trusts are not used often is that once the beneficiaries have reached 18 years of age, they can demand the transfer of all the capital. Also, if the beneficiary dies, the assets form part of their estate for IHT purposes. This is not the case in Discretionary Trusts as distributions from the trusts are entirely at the discretion of the trustees.

Usual uses of Bare Trusts in the past

A grandparent setting aside money for grandchildren’s education is quite a common use. The Capital Gains Tax arising on the beneficiaries is advantageous, and the grandparents may also want to use their full discretionary allowance for other purposes like Inheritance Tax planning.

The present uses of Bare Trusts 

For people with significant capital, gifts may want to be made into a discounted gift trust using a Bare Trust arrangement which retains the right for up to 5% return of capital tax-free yearly to the settlors and cannot be wound up by the beneficiaries during the life of the settlor.

Large gifts using Bare and Discretionary Trusts

Using a Bare Trust enables a large gift to be made which will not generate an immediate income tax charge on the trust if the gift exceeds the current Nil rate band allowance (£325,000 in tax year 2019/20).

The settlor can also gift £325,000 into a Discretionary Trust at the same time, thus reducing the value of the estate after seven years and making a significant saving on Inheritance Tax.

As always experienced advice is important in this field. Contact us if you require help in this area.

Join our Newsletter

Subscribe and get the latest updates about inheritance tax and Estate Planning into your mailbox.

We help people with over £1 million in current assets pay ZERO in UK inheritance tax

One stop comprehensive specialist advice - Tax, financial planning and legal advice service with 18 years experience.

What our clients say
Read our 159
    
reviews

"It is gratifying to finally come across an adviser who gives sensible ongoing advice which is very client focused."

Frank Hibberd

Retired gentleman

"It is nice to know that we can now be certain that our daughter will inherit our money without giving a large slice of it to the government ."

Tony & Sue Perriss

"Everyone's situation is different but having an initial discussion with Charles has really helped me personally navigate what can be a daunting subject."

Bobby Chadda

"I particularly want to thank you for the open and transparent manner in which you have serviced my tax planning needs since I first met you seven or so years ago. In arranging my tax planning through you, I have confidence"

Michael Mahon

Retired gentleman

"Charles was really helpful from the outset and quickly clarified our situation for us... I have used Bluebond for  IHT and other tax advice and they have been very helpful with both. Charles is a very experienced and knowledgeable individual and I highly recommend Bluebond's services."

Sam Attenborough

Retired gentleman

I have used Bluebond for setting up a discretionary trust for my children as well as inheritance tax and estate planning for my home and  other properties. Having searched for years, it was only after meeting and speaking with Charles that I felt confident enough to take these next steps, and I'm very glad I did. His ability to explain complex issues in simple terms and walk you through every step of the process is quite simply unparalleled.

Imran Qureshi

Excellent and comprehensive advice concerning all things financial in one place. Enthusiastic, Educational, Expert, value oriented, Professional and Polite are adjectives that come to mind as well as great attention to detail.

Deirdre Buckley

Inheritance tax is a minefield. Charles de Lastic of Bluebond Tax Planning is the best in the business at helping you to chart the path that is right for you to ensure your estate is structured in the most tax efficient manner.

Nicholas Dickinson

Charles provides clients with valuable insights that clearly demonstrate expertise built over the years. Charles and his team guided us through a estate planning journey and then addressing complex Inheritance Tax matters. They have been very transparent with their advice and cost. Overall an excellent service. Highly recommended

Shailesh Karia

The information contained in this web site is for UK consumers only.  Like most firms of solicitors and accountants, Bluebond Tax Planning is not regulated by the FCA. The content of this website does not constitute FCA regulated financial advice and all content is provided for general information purposes only. Bluebond is not responsible for any action you may take as a result of information on this site. All advice will be delivered on a personal basis once we fully understand your situation and our client agreements have been signed.

Copyright © 2024 Bluebond.co.uk
-
Copyright Notice
-
Legal Disclaimer
-
Terms & Conditions
-
Privacy Policy