A matter of trust for heirs to your fortune

There are ways to prevent some of your legacies from being swallowed up in inheritance tax bills
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You don't have to be heir to a fortune to face a massive inheritance tax bill. With property prices rocketing as they did in the late 1990s, far more estates will now be subject to the levy.

You don't have to be heir to a fortune to face a massive inheritance tax bill. With property prices rocketing as they did in the late 1990s, far more estates will now be subject to the levy.

The threshold for IHT is now £234,000 - the price of a three-bedroom terraced house in west London. Any assets above this level will be taxed at 40 per cent, although bequests to your spouse are tax free.

But even though in opposition the Government declared its intention to close IHT loopholes, there are still ways to keep legacies away from the tax collector. You can put assets into trust either while you are alive, or through your will.

Trusts take many shapes and forms. They are a way of choosing who will benefit from certain assets, without giving them control of those assets straight away. A trust is created with a document - a trust deed - which sets out the terms of the trust and names the people involved. Your will can also create one in the same way. Solicitors can draw up trust deeds, but in many cases you can use standard trust forms. Life assurance firms, for example, offer trusts which have been drafted to be used with certain life insurance policies - the benefit paid out goes straight into a trust.

How can a trust help your heirs save IHT? One way to reduce IHT is to give assets away to your friends and family while you are still alive. But if you die within seven years of making such a gift, it will count for tax purposes as an inheritance.

The amount payable reduces the longer you survive after the give-away. During the first three years, there is no exemption from the 40 per cent tax, but in the fourth year, relief is given at 20 per cent. This increases by 20 per cent a year to 80 per cent in the seventh year and 100 per cent if the person making the gift survives for longer. So you could give away assets you don't need. If your children are too young to handle a large inheritance, the gift can be made in the form of a discretionary trust.

"Provided you live for at least seven years after setting up the trusts, it doesn't count as part of your estate," says Jennifer Storrow of the Shrewsbury-based IFAs Gee and Company.

But the most common way trusts are used in IHT planning, says Ms Storrow, when a couple wills the individual's IHT allowance to be put into trust for their children on the first death. "The reason for doing this is that each of the individuals would use their IHT allowance," she says.

This is useful for people whose estates will lead to a large IHT liability, and who have significant non-property assets. A discretionary will trust is created by the will of the first spouse to die, but the surviving spouse may still be able to draw an income from the assets if necessary, says James Dalby of IFAs Bates Investment Services in Leeds.

Trusts can be useful financial tools for other purposes too. They can be used to save income and capital gains tax, and when making investments for children, allowing trustees to keep control of the investment until the child or children are 18, 21, or 25, for example.

When a trust is set up, there are three main parties involved: the person making the gift is the donor or settlor, the trustees become the legal owners of the property and the person who will benefit from this is the beneficiary.

There are many different types of trust. Discretionary trusts are commonly used to save income tax, capital gains tax and IHT. Trustees can choose to pay income or capital or both to the beneficiary of the trust, but can also take back the assets if necessary.

With an absolute trust, beneficiaries are entitled to all the trust's benefits, including the capital and any income generated by it. But it is up to the trustees exactly when and how much of the assets are distributed to the beneficiaries, giving them control. An accumulation and maintenance trust is a type of discretionary trust which is generally only used for the benefit of children and grandchildren. It could be set up to provide funds for education, for example. The trustees can pay income from the trust to beneficiaries for school fees, or maintenance for example.

Another type of trust used to save IHT is a flexible interest-in-possession trust. Here there may be one beneficiary who receives the interest while another will eventually be entitled to the capital.

This trust is flexible in that the trustees can increase or reduce the level of income paid by the trust, says Chris Jordan of Cardiff-based financial planners Cavendish Financial Management. Life assurance poli-cies can be put under trust, and most life assurance firms have ready-made trusts already drafted to be used with their policies. This service is often free. Life assurance benefits would also be taxed as part of your estate unless they were put in trust. Scottish Provident says that apart from tax planning, another reason for assets to be put under trust is to make sure your heirs can access money as soon as you die.

If an asset is not under trust, the executors of your will need to get probate, in England and Wales, or confirmation in Scotland, before they can deal with that asset. This can take weeks even if you have made a will, but when someone has died leaving no will, the process can take several months. In the meantime, dependants could face financial hardship.

Whether a trust is suitable for you depends on your individual circumstances. Anyone considering using a trust should first get good professional advice from a financial adviser or solicitor.


Gee & Company: 01743 236982

Bates Investment Services: 0113 2955955

Cavendish Financial Management: 01222 665588

Scottish Provident's brief guide to trusts is available by phoning: 0845 3301212

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