The tax-efficient gift
INHERITANCE tax poses a bigger threat to our wealth than ever but families may be able to do more to beat off HMRC’S tax grab than they think.
Many ordinary families could reduce their exposure by setting up a trust, but often do not consider this option because they think it is only for the super-wealthy, said Stacey Love, technical manager for tax, trusts and estate planning at Canada Life: “Trusts aren’t just for the rich, your family could benefit too.”
A trust is a legal arrangement that allows you to pass assets to loved ones in a tax-efficient manner, while retaining some control over how they are used.
Families typically set up trusts to pass money to children or grandchildren, to help pay for university fees, driving lessons and house deposits.
Some fear youngsters will be spoilt by having a lot of money at a young age, and use a trust to limit how and when they receive the cash. Others worry that their child or grandchild has entered a bad marriage, and do not want the money to go to their spouse on divorce. By making a gift in trust, the courts may be unable to demand it forms part of any divorce settlement.
Trusts can also help a bereaved, vulnerable or disabled child manage their money. “Divorcing couples use it to provide for the maintenance and welfare of the children,” Love added.you can gift
a range of assets into a trust, including cash, equities, family company shares, insurance policies, property and even paintings or antique furniture.
Frequently, the donor elects to be a trustee, as they retain control over how the gifted assets are used.
Trusts could also help you save inheritance tax.assets gifted inside a trust will fall out of your estate if you live for another seven years, and do not benefit from any of the income and capital.the same goes for your partner, if you are married.
If you gift assets outside a trust instead, they will also be Iht-free if you survive for seven years.the downside is that you will also have relinquished all control over that money with immediate effect.
There are several different types of trust, and you should seek specialist advice to find out which of them best suits your needs.
The simplest is a bare trust, which many parents and grandparents use to build a nest egg for children.
If the trust has been set up by a parent, they will pay tax on any income generated above £100 a year (£200 if the couple made a joint gift).this does not apply to grandparents.
Bare trusts are quite rigid and beneficiaries cannot change, whereas discretionary trusts are more flexible.this makes them ideal for those who want to make a gift but have not decided who should benefit, or fear the recipient isn’t ready to manage it yet.
Discretionary trusts can be changed to include any future son or daughter-in-law, say, or children from a second marriage.
If you transfer more than the inheritance nil-rate band of £325,000 into a trust, you may pay IHT on the surplus at 20 per cent, plus up to another 20 per cent if you die within the next seven years.
Alternatively, a will trust allows a married couple to maximise both their £325,000 inheritance tax allowances.
On the first death, £325,000 is gifted tax-free into the trust.
The remainder of the estate is passed tax-free to the surviving spouse, who may also use their £325,000 allowance when they finally die.
Importantly, the surviving spouse has continuing access to assets within a will trust.
While expert advice can cost several thousand pounds, the savings may be much greater.