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Inheritance Tax Planning and Trusts

Trusts can be used as mechanisms to reduce a person’s liability to inheritance tax (IHT), often known as a voluntary tax.
On death, if the value of a deceased person’s estate exceeds the available nil rate band (NRB), the amount in excess of the NRB is taxed at 40%.  It is possible through the use of trusts to reduce the size of your estate prior to your death, in order to reduce your tax bill, whilst also allowing you to protect your assets for future generations.
Assets such as life policies, death in service benefits and pension policies can and should be written into trust during your lifetime to ensure that any benefits payable fall outside of your estate upon your death, thereby avoiding the tax charge of 40%.  You can nominate the benefits to be paid to a specific person, for example, your spouse, although it may be tax efficient to have the benefits paid into a bypass trust under which your spouse can benefit, but the proceeds will never form a part of their estate for IHT purposes thereby avoiding the 40% tax charge.  Upon their death, the proceeds could be paid out of the trust to your ultimate beneficiaries, for example, your children.
It is possible to gift assets to reduce the value of your estate for IHT purposes; provided you survive for seven years from the date of the gift.  The value of that gift will not form a part of your estate upon your death.  However, you may not wish to gift your assets outright to a specific person, particularly if you wish to protect your family assets from divorce, bankruptcy, spendthrift beneficiaries or even for future generations who are minors or may not be in existence yet.  The solution is to make the gift to a trust instead of a specific beneficiary; a trust would allow you to decide who to benefit and how during your lifetime, rather than at the time of making the gift, which allows you to make a tax-efficient gift whilst retaining maximum flexibility.
Trusts are subject to their own IHT regime; they have their own NRB and any assets above that are taxed at a maximum of 6% every ten years as opposed to 40%, which would be the rate if they formed a part of an individual’s estate as would be the case if you left assets to a specific person.
For further advice or assistance please contact Neelam Maher.