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Setting up a trust has long been seen as the preserve of the wealthy and criticised as a way for families to pass fortunes through generations by avoiding death duties. However trusts are a useful, legitimate vehicle for saving tax.

Inheritance tax (IHT) is normally charged at 40% on an individual’s directly owned assets in excess of the nil rate band. This threshold currently stands at £325,000 for an individual (or potentially £650,000, for a married couple or civil partnership).

If you have assets which exceed the £325,000 nil rate band a trust can be set up to pass assets down the generations without IHT being incurred. There’s no minimum amount required – you don’t need to hide away millions.

If you do utilise a trust you will need to survive seven years for the assets to be excluded from your estate for IHT purposes. Also you must be aware that you are effectively giving assets away, as the trust can’t be unravelled and the money returned back to you.

There are a couple of types of trust to make you aware of –

  1. Discretionary Trust – A very common form and widely used to reduce IHT. Your trustees use their discretion to decide how much your beneficiaries receive and when. There is an immediate IHT liability of 20% of the value of the assets going into the trust, if the taxable value is above the nil rate band of £325,000.
  2. Absolute Trust/Bare – The trust is set up in a specific person’s name and can’t be altered, only one person will benefit. These can often be popular with grandparents wanting to leave assets to younger generations. With an absolute trust there is no limit on the amount that can be put into it and no immediate tax is payable.

As ever, if you have any questions, please feel free to contact Michael Burgess on 01782 279615.