Inheritance Tax Planning and Trusts  
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It is not possible to go into a great deal of detail about trusts in a document such as this.  However, it is possible to consider briefly why individuals might use a trust.  Here we will look at two simple examples to highlight two reasons:

  • Control
  • Simplicity and speed of administration

Control of an Asset

In simple terms, a Trust allows an individual to pass beneficial ownership of an item to another person, whilst not letting them control it directly.  The best way to consider this would be to look at some examples:

John and Janet’s son William is going off to university shortly on a course that is going to last six years.  They want to buy a house for William to live in whilst he is there.

If John & Janet buy the house in their name then this would of course give them total control over the property, as they own it.  However, if they were to die, it would in their estate for IHT purposes and perhaps more importantly when it is sold, there could be a Capital Gains Tax liability on the sale proceeds.

However, if they use a trust to buy the property, but of course it must be an appropriately worded trust, then:

  • Assuming they are the trustees, they will still exercise total control over the property.  It does not belong to William, but he is able to use it.
  • If they die, then the property is not in their estate for IHT purposes.
  • If William is the “Life Tennant” and he lives in the property, then when the property is sold, there is no Capital Gains Tax to pay.

Of course the money in the trust can’t ever go back to John & Janet, but if John set the trust up on his own, then Janet could be a potential beneficiary of it.  The trust property can only be used to benefit the people named in the trust, but this could include a wide range of people, not just William.

So then, by using a trust for this purpose, John & Janet have retained control of the house, but have also benefited from some tax advantages.

Simplicity and Speed of Administration

We have already mentioned that when someone dies, their Executors are not able to distribute assets from the Estate until they have received Grant of Probate.  To be granted Probate, any IHT liability must first be settled.  This can cause delays of several months between deceased’s date of death and the time when their family members can have access to some of the assets.  This can cause complications in some circumstances.

One option is to utilise what is often referred to as a “Probate Trust” and it can be seen as a useful way of moving assets out of the delays of probate.  For many such an arrangement has become less attractive than it was prior to the 2006 Budget changes, but this still has a place for some.

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