How setting up a trust can protect inheritance

structured to add greatest benefit is a must. After all, sons and daughters may themselves be retired yet one or both parents are still living.

Trusts are set up for many reasons – to control and protect family assets; when someone is too young to handle their affairs; when someone can’t handle their affairs because they are incapacitated; to pass on assets while you are still alive; and to pass on assets when you die via a ‘will trust’.

It can provide asset protection from bankruptcy, divorce and beneficiaries who may wish to spend, spend, spend; provision of education fees for children or grandchildren; provision of care home fees for elderly parents or grandparents; as well as IHT reduction.

Perhaps the most prominent example of the latter came last year when Gerald, the 6th Duke of Westminster, died at the age of 54, leaving an estimated estate of £9.9 billion.

In theory, his heir, Hugh Grosvenor, was in line to face 40 per cent death duties on an estate comprising 300 acres of London, including parts of Belgravia and Mayfair, and a string of country estates in Scotland, Oxford and Cheshire.

But because everything was held in trust it was expected only a minimal payment would be due.

Not surprising then that IHT duties are a modest source of revenue for the Treasury. HMRC collected total tax of £534 billion in 2015-16, of which IHT receipts represented £4.7 billion.

But trust status can be highly beneficial to ‘ordinary’ mortals too.

I recently came across the case of a widow in her nineties, now resident in a care home, and worth £800,000-plus.

Some £200,000 is in a long-standing trust to her two sons with her receiving the share dividends for life.

In terms of reducing the rest of the IHT liability, she has like everyone else a £325,000 standard allowance. From April 6 this year she is due an additional ‘residence nil-rate band’ of £100,000 despite the family home being sold in the last few months, and a similar amount can be claimed in relation to her husband even though he has been dead for many years. Then, if £100,000 worth of AIM shares are bought, if she lives another two years, they will be outwith IHT, a method by which the government seeks to encourage investment in start-up and high tech young businesses.

At that point she would avoid all future IHT.

Beware though. Trusts are subject to charges every 10 years from the anniversary of their creation. Known as the inheritance tax periodic charge, it can amount to six per cent of the funds held. There are, however, loopholes, agricultural and business property relief, for example.

And, there are many types of trust, with some facing inheritance tax in their own right while others might have to meet income tax or capital gains tax.

So, it is essential to seek advice on which is best suited to your needs. Trevor Law is managing director of Merito Financial Services, chartered financial planners, based in Solihull. Email:tilaw@meritofs.com