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What is an Inheritance Tax Trust?

In this blog, I will be explaining what a trust is, how to set up a trust, and how they function in general.

What is a Trust?

A trust is a separate legal entity. This means that it exists separately in English law in the same way that each person is treated separately for tax purposes. A trust functions to ensure that you, or someone you choose, can retain control of your assets.

There are many different types of trusts: you can write trusts into your will or you can create lifetime trusts which are set up during someone’s lifetime. 

A good analogy is viewing a trust as a strongbox which is made by lawyers, with more complex and better strongboxes requiring better lawyers. A person called the settlor puts the assets into the box.  These assets can then be ‘locked away’ until they are used for the benefit of the beneficiaries.  However, the trustees keep the keys and have control of the assets.

How do you Create a Trust?

A trust must be written out properly which is why good lawyers are essential. Here, Bluebond uses some of the best lawyers in the country to ensure this occurs.

There are four main parts to a trust:

  1. The settlor – This is the person who often has an inheritance tax problem places the assets into a trust to remove them from his/her estate. This can happen during the settlor’s lifetime or upon their death (depending on the type of trust).
  2. The trustees – These are the people who control the trust and usually happen to be the settlors and their adult children.
  3. The beneficiaries – The beneficiaries are the people who benefit from the trust assets and the income that they generate. They are usually the adult children and grandchildren.
  4. The settlement – This is the amount placed into the trust which can range from as little as £10 to much larger amounts. Placing the £10 into the trust ensure it exists immediately and is called a lifetime pilot trust.

Will Trusts and Lifetime Trusts

Assets that are gifted are better protected when gifted into a trust than when given directly to people, for example, to children. If you set up a trust within your Will, the settlement will not take place until you die as only then will they trust come into existence and the assets go into the trust.  For this reason, we prefer lifetime trusts where the assets are gifted during the lifetime, even though Will Trusts can be cheaper to set up.  In addition, lifetime trusts can be especially useful for people with big inheritance tax problems.

Trusts Compared to Limited Companies

A trust can also be thought of as similar to a limited company where the trust settlors are equivalent to the people who set the company, the trustees are equivalent to the directors of the company, and the beneficiaries equivalent to the company shareholders.  Also, like trusts, limited companies are taxed differently to individuals in the UK.

Complex Rules on Tax

Trusts have complex rules, especially on tax. There are initial charges when money is put in and a limit of £325,000 currently in 2020 to the amount that can go in without an immediate tax charge of 20%. Moreover, every 10 years there can be an income tax charge on the trustees called a ‘periodic charge.’ The capital gains tax charge will also be different.  Essentially, the tax rules are different around trusts than they are for people or companies.

In Summary

Always get good advice from an experienced practitioner before setting up a trust.  There are many different types of trusts to suit different people and their needs. For example, a flexible reversionary trust enables you to put money in and then get it back over a period of time should you wish to.  If you do not want it back, it stays in the trust and after 7 years it is outside of your estate. 

Personally, I believe that lifetime trusts are the best option when compared to Will trusts

Like all matters related to inheritance tax experienced advice is essential.

Call us if you require any help.


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