Establishing a Trust Fund to Mitigate Inheritance Tax: A Legal Perspective

Establishing a Trust Fund to Mitigate Inheritance Tax: A Legal Perspective
  • PublishedAugust 24, 2023

Many individuals and families throughout the UK need to deal with Inheritance Tax (IHT), especially those with higher value estates. Trust funds can help with this. In the following guide, we explore the concept of trust funds, providing you with a well-rounded explanation of the legal aspects and consequences tied to trust funds and IHT.

What is Inheritance Tax?

IHT is a tax imposed on an individual’s estate, encompassing all property and other assets at the time of their passing. The tax is determined by the value of the estate and becomes applicable if this value exceeds the existing nil-rate band threshold of £325,000, or under specific conditions, £500,000. An estate assessed above this figure will be taxed at a rate of 40%. This tax may significantly diminish the wealth intended for your family, making it vital to thoughtfully plan to avoid this where possible.

How Do Trust Funds Work?

A trust fund is a legal construct enabling a third-party, referred to as a trustee, to possess and manage assets for the benefit of the trust’s beneficiaries – the recipients of the wealth.

Trusts vary in their nature and attributes, offering adaptability in their application. Ranging from bare trusts, providing beneficiaries full rights to income and capital within the trust, to discretionary trusts with variable entitlements, each kind addresses varying needs and goals. Trusts serve as an important instrument in estate planning, efficiently managing wealth, thereby ensuring an easy transition to successive generations.

How Do Trust Funds Relate to Inheritance Tax?

Trusts are a tried-and-tested lawful method to lessen IHT, supported by legislation. Yet, the legal procedures to create trusts, alongside their IHT implications, can be intricate, demanding detailed knowledge of UK legal and tax issues.

Professional guidance from expert solicitors is essential as errors in forming a trust may result in serious legal and financial ramifications.

By transferring assets into a trust, they might cease to be part of your estate for IHT reasons, as they officially become the trust’s property.

In addition to their role in curtailing Inheritance Tax, trusts offer numerous other advantages, like more extensive control over the distribution of inheritance and safeguards against creditors.

What are the Limitations of Trusts?

Despite the clear advantages, the creation of a trust must be handled with care. On occasion, the expected tax benefits may not be so straightforward. Laws may shift and asset ownership might be contested later where not possible before. Trusts can also fall under their own tax laws, necessitating careful scrutiny. For the best results, consult a legal expert to evaluate your circumstances.

Secure Your Inheritance Through a Trust

Trust funds stand as a potent means to avert substantial IHT obligations.A solid grasp of these nuances, guided by a legal expert, will empower you to make well-informed choices about estate planning, aligning with your tax goals and your beneficiaries’ wellbeing.

Read our guide to offshore bank accounts.

Written By
Gesten Van Der Post

Leave a Reply

Your email address will not be published. Required fields are marked *