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Following on from the changes to Inheritance Tax in the Autumn Budget and the ripple effect across our clients, Simon Hurren looks at the pros and cons of using Trusts to mitigate Inheritance Tax costs.
Firstly, it’s important to understand what a Trust is.
Simply put, a Trust holds assets for either individually named beneficiaries or potentially a class of beneficiaries, such as ‘all of my future grandchildren’. Trustees manage the Trust assets in the best interest of the beneficiaries and where the Trust is discretionary (i.e. the Trustees can decide when and how much to appoint to any of the beneficiaries) the Trustees retain control over the assets and the amount of benefit the beneficiaries have, depending on the original intention of the Trust. The person who sets up the Trust can also be a Trustee.
So why use a Trust?
Trusts are a fantastic tool for asset protection. And this can be particularly important where the beneficiaries may not yet be of an age where you are happy for them to have access to the full asset (would you be happy for your 18-yearold child or grandchild to have £1 million outright?). However, you’d like them to benefit from the assets, whether that’s a property to live in or to benefit from the income generated.
Trusts can also help to protect assets should the beneficiaries get divorced. The rules and case law is complex in this area so it’s important to take advice on the structure of the Trust and how this could be used should the beneficiaries get divorced in the future. But Trusts offer potential protection that would not be there if the asset was otherwise owned directly by the beneficiary.
From an Inheritance Tax perspective, any transfers into Trust are outside of your Estate after 7 years. This therefore allows you to start the 7 year clock whilst retaining some control over the assets. There can be an immediate charge to Inheritance Tax where the value of the initial transfer exceeds your available nil rate band so advice should be taken before any transfers are made.
Discretionary Trusts fall into the relevant property regime and are subject to Inheritance Tax charges every 10 years (sometimes referred to as the 10-year charge). The calculations for this are complex but the maximum amount of IHT payable on the 10-year anniversary is 6% which is substantially lower than the full rate of IHT of 40%.
Business assets and agricultural assets
With the recent reductions announced to Agricultural Property Relief (APR) and Business Property Relief (BPR), to 100% on the first £1 million of assets and 50% thereafter, Trusts can again be a useful tool to help mitigate IHT. HMRC have released a consultation on how these changes will impact Trusts (released February 2025) and whilst the rules are not final, we can see that the intention is for a Trust to have a £1 million threshold.
This will be available to the Trust on the 10 year anniversary and it’s proposed that it will ‘refresh’ every 10 years. Therefore, if a Trust holds agricultural and business assets below £1million no IHT would be due on the 10 year anniversary and at the next 10 year anniversary the full £1 million would still be available (i.e. it’s not reduced by the amount of the threshold used at the previous 10 year anniversary). Whilst it’s proposed that a Trust will have it’s own £1 million threshold, there will be anti avoidance provisions in place to prevent you from setting up multiple Trusts.
We will of course need to wait until the consultation has finished and the legislation is finalised, but it’s interesting to see how Trusts could be particularly beneficial for those holding farming or business assets to maximise the relief available.
The downsides of a Trust
The main thing to be aware of is that once assets are transferred into Trust, the settlor (the individual who has transferred the assets) cannot continue to benefit from the assets held within the Trust, otherwise this will be a settlor interested Trust and subject to various anti-avoidance provisions. Most of which would essentially unravel the potential benefits of creating a Trust in the first place. It’s also worth bearing in mind that a Trust is a separate entity and therefore there’ll be additional administration to consider. Any trust, whether it is generating taxable income or not, must be registered with HMRC. Should the Trust receive the income or realise capital gains then tax returns will need to be filed. Likewise, a separate bank account will be required.
In summary, Trusts can be a very useful tool when it comes to protecting your assets and assisting with Estate planning. But as always they should form part of a wider IHT planning strategy and care should be taken before creating one as they can be very difficult and costly to unwind in the future.
Our team have knowledge and experience of dealing with multiple trust cases and we’re here to help guide you to determine whether a Trust may be beneficial to your circumstances. Contact Simon or one of the team on 0330 058 6559 or email hello@scruttonbland.co.uk
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