Trust & Estate Planning

The person who transfers assets into the Trust, is called the Settlor. They can also be a Trustee. For legal reasons – if you want the Trust to be able to sell property – you should have at least two Trustees up to four. Beneficiaries of Trusts can also be Trustees. Trusts can last for up to 125 years and beneficiaries can be added in the future. It is also possible to add assets to a Trust after it has been established.

Should I set up a Trust? 

Trust planning is largely ineffective if the Settlor retains any rights in the property, such as a right to rental income or a right to occupy the property. If the Settlor does retain an interest in the property, then on their death that asset is still counted as part of their estate for IHT purposes.

Transfers into a Trust work best with property that is not mortgaged, because the mortgage lender may have the legal power to block the transfer, (or charge a participation fee); and the trustees may become chargeable to stamp duty land tax (or its equivalent) for having agreed to take over the burden of the mortgage when they take over the property. A similar charge could arise on transfer out as well.

Inheritance Tax

There is an Inheritance Tax charge of 20%, payable when assets are transferred into a Trust.

If you survive for 7 years after transferring assets into a Trust, the value of those assets is excluded from your estate, so you can save 20% IHT (the IHT rate on death is currently 40%). However, if you retain an interest in those assets, their value is included in your estate.

There is no IHT payable on the first £325,000 of someone’s estate, so if you transfer assets into a Trust 20% IHT is payable only on the value of the assets above £325,000 of nil rate band. A surviving spouse can have their late husband or wife’s unused nil rate band added to their nil rate band, taking the amount potentially to £650,000.

Trusts also incur 10-year anniversary charges.

Broadly, on each 10-year anniversary the Trust is taxed on the value of the Trust less the nil rate band available to the Trust. The rate you pay on this excess is 6% (calculated as 30% of the lifetime rate, currently 20%). If the value of the Trust is less than the nil rate band, there will be no charge.

There is also an Inheritance Tax exit charge whereby IHT is charged up to a maximum of 6% on assets (e.g., money, land or buildings) transferred out of a trust – a transfer out of a trust can occur when the trust comes to an end or some of the assets within the trust are distributed to beneficiaries.

Income Tax

Income realized on assets inside a Trust is subject to income tax. If income is not distributed to beneficiaries then tax is paid by the Trust every year. If beneficiaries receive distributions from a Trust, they will usually be taxed individually on this income. 

Capital Gains Tax

Trusts are taxable entities; however, preferential capital gains rates can be used. Trusts can also offset capital gains and a set amount of ordinary capital losses, while carrying excess loss into future tax years. Trusts can offset capital gains through capital losses, and they can carry over excess losses that go beyond the cap to future tax years. These losses cannot be passed through to beneficiaries.

Payment of IHT

You must pay Inheritance Tax on transfers into a Trust (or out of a Trust known as ‘exit charges’) no later than 6 months after the end of the month the transfer was made. The 10-year anniversary charge can be paid up to 6 months after the 10th anniversary of the date the Trust was set up. There are three steps to paying IHT on transfers into trusts.

• Get your Inheritance Tax payment reference number at least 3 weeks before you want to make a payment by filling in Form IHT122.

• Send Inheritance Tax Account form IHT100 to HM Revenue and Customs (HMRC).

• Pay the Inheritance Tax, either through a bank or building society or by cheque through the post.

Registration of Trusts 

Trusts must be registered with HMRC to comply with anti-money laundering regulations. All trustees are equally legally responsible for the Trust, but you must nominate one ‘lead’ trustee to be the main point of contact for HMRC. The lead trustee will receive the trust’s Unique Taxpayer Reference.

If you require advice or assistance with setting up and registering a Trust, our Private Client solicitors will help you. Please get in touch with us on 020 8240 9018 or submit the enquiry form on our website.