Trusts and estate planning in the UK
Find out more about how trusts and estate planning can help protect your assets, reduce inheritance tax, and ensure your family’s financial security.
When you're planning to leave an inheritance, you will most likely intend to focus on two main goals.
You will want your chosen beneficiaries to inherit your wealth according to your wishes, and you'll want to minimise the amount lost to inheritance tax (IHT).
To achieve these goals, you’ll need an up-to-date will, and you can reduce the size of your taxable estate, for instance, by making gifts during your lifetime.
However, sometimes, these measures alone may not be enough to achieve your goals.
If so, your adviser may recommend that you use a trust.
What is a trust?
A trust is a legal arrangement in which a ‘trustee,’ which may be one or more individuals or a company, keeps assets for the benefit of a ‘beneficiary’ (usually one or more individuals).
The assets, usually money, property or investments, may eventually pass to the beneficiary (for example, when they reach a certain age) or may be held for a long period of time to provide them with a specific benefit (e.g. a place to live or an income).
Trusts are often used when the beneficiary isn’t able to manage the assets themselves, for example, if they are dependent children.
Placing assets into a trust will also ensure they are reserved for that particular beneficiary rather than being spent or otherwise disposed of.
Last but not least, trusts can be used to reduce your IHT bill.
How can you use trusts to reduce inheritance tax?
When you place assets into a trust, you are no longer their owner (the trustee is).
The assets are, therefore, not part of your estate and so will not be subject to IHT when you die.
A trust can also help your beneficiaries pay an IHT bill. You can set up special life insurance to pay into a trust, so it falls outside your estate, and and covers the amount to be paid.
There are a few things to watch out for:
If you give away assets and still use them (eg, living in your home), it won’t be classed as a true gift. This is known as a gift with reservation of benefit.
If you place assets into a trust within seven years of your death, they will be counted as part of your estate when you die.
If the gift is more than the nil rate band of £325,000, there will be an immediate tax charge of 20% on the amount over £325,000.
How do I set up a trust fund?
There are several types of trusts, suitable for different purposes.
Here are some of the different types and how they work in our table below:
| Type | How it works |
|---|---|
| Bare trusts | A simple trust used to hold assets until the beneficiary, such as a child, takes ownership |
| Discretionary gift trusts | Ownership of the assets is relinquished to the trust, but you stipulate how you would like them to be used by the beneficiaries |
| Loan trusts | Your assets are lent to the trust to limit future gains on the assets. You retain ownership of the assets, but any investment income is held in the trust |
| Discounted gift trusts | Generally used to hold insurance bonds and allow you to receive income from them each year |
For instance, you may want the beneficiaries to inherit as soon as you die or only once they reach a certain age, or you may want a trust to hold onto assets but only pay an income.
In such cases, you may make use of a ‘bare trust’ or a ‘discretionary trust’.
Generally, you can tailor a trust to suit your particular circumstances, so ask your solicitor about which type will be most suitable.
You can set up a trust at any time, or write one into your will.
Trusts set up as part of a will may have the executor as trustee, but you can choose another trustee if you wish.
Remember that the assets you place into the trust will no longer be yours, so make sure you won’t need them anymore.
The laws surrounding trusts are complex, especially concerning inheritance tax.
If you make a mistake when setting up a trust, it could create a tax bill for you, so consult a solicitor whenever you're considering this option.
Get expert financial advice
Using trusts effectively can be a powerful way to manage your estate and reduce inheritance tax, but navigating the complexities requires careful planning.
By understanding the different types of trusts and their potential impact on your estate, you can make informed decisions that align with your goals and ensure your assets are distributed according to your wishes.
Always consult with a solicitor or financial adviser to tailor the trust to your needs and stay updated with any changes in tax laws.
Unbiased will match you with a financial adviser for expert financial advice tailored to your estate planning needs to help you navigate the complexities of trusts and inheritance tax with confidence.
If you found this article helpful, you might also find our articles on business property relief and estate planning for blended families informative too.
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