Today, whether you’re among the super wealthy who have employed trusts for some time, or indeed a Crusader, trusts may be useful for you. Let’s look at the top five tax advantages trusts offer.
1. DISCRETIONARY TRUST
A settlor (you) gifts into trust assets for the benefit of named beneficiaries. If the gift is valued at less than £331,000 and you have not used the nil rate band and annual allowances, the gift will be inheritance tax (IHT) free at that stage. Beneficiaries can offset their annual personal allowance of £11,850 against income and receive a refund of tax paid by the trust. After seven years the settlor can initiate this process again.
2. LOAN TRUST
An individual (you) loans assets to a bespoke trust with a beneficiary trust running alongside. You can call this loan at any time but will usually receive up to 5% a year income from the trust. The loan tapers down over 20 years but any investment appreciation accrues over the years in the trust, IHT free. After 20 years the settlor’s loan in the trust will have reduced to nil and, with good investment advice, the beneficiary trust will have increased IHT-free.
3. DISCOUNTED GIFT TRUST
This trust can only receive cash, or an assignment of an existing life policy (valued at point its assigned into the trust), but offers an immediate IHT advantage and drawdown of capital for the settlor (you). When you gift a lump sum to the trust, the insurance company calculates actuarially how long you might live and values that at £X. This is your discount which is IHT-free even if you die immediately after setting it up – providing the balance is less than your unutilised nil rate band (which is also exempt from IHT). Your beneficiary(s) receive IHT-free capital on your death, but until then you receive up to a 5% annual income from the trust.
4. EXCLUDED PROPERTY TRUST
If you and/or or your spouse are not UK-domiciled, you can establish this trust, usually with foreign property – but certain UK gilts, unit trusts, and foreign currency accounts will also be IHT free. This applies if the non-UK domiciled settlor goes on to live in the UK and becomes deemed domiciled there after 15 years.
5. SPLIT TRUST
Split trusts or retained benefit trusts are part gift for the beneficiary and part capital return for you, the settlor. They share many features with the loan and discounted gift trusts and are often made through an insurance company bond investment – again producing, a double tax advantage for you – the settlor of the trust.
There are numerous tax advantaged trusts for particular situations: asset protection, personal injury payments, disabled persons, bereaved minors, persons aged 18-25 and second marriages. If you are looking for a bespoke trust, get in touch with your financial adviser. Unlike the Crusaders, you won’t have to go on a crusade to get the tax benefits.
By Huw Wedlock
Tel: +65 6225 0825