Trust in trusts

The last decade has witnessed a number of legal reforms aimed at cracking down on the use of trusts as a potential means of tax avoidance. However, despite these changes, trusts can still provide an effective way to transfer wealth and thereby help families achieve their financial goals.

What is a trust?

A trust is a legal arrangement which allows assets, usually property, investments or money, to be managed by a trustee for the good of one or more beneficiaries. These beneficiaries can be named individuals, such as your children, and people who are yet to be born. There are many different types of trusts with the main ones being: bare trusts, interest in possession trusts, discretionary trusts, accumulation trusts, mixed trusts, settlor-interested trusts and non-resident trusts. The type of trust that is right for you will depend upon your objectives and personal circumstances.

Advantages of establishing a trust

Trusts can be set up for a variety of purposes with one of the main reasons as a tax planning tool in order to mitigate a potential Inheritance Tax liability. They are also commonly used to set aside money or assets for dependants who are either young or mentally incapacitated, and also to protect family assets particularly so they cannot be sold to pay for residential care fees. In order to set up a trust, you will need to appoint trustees to look after the assets in the trust on behalf of the beneficiaries. A key aspect when creating or maintaining a trust will be ensuring ongoing compliance with current tax law. This will inevitably require professional advice in order to ensure the trust meets all of its tax obligations.

High numbers unaware of IHT gifting rules

Recent research (4) has revealed that just 45% of people looking to gift money are aware of the rules and exemptions surrounding Inheritance Tax (IHT). Only a quarter (25%) of respondents admitted to possessing a ‘working knowledge’ of the rules surrounding gifting. The rules relating to gifts can appear confusing and if you’re unsure of the tax implications then it is always best to seek advice.

(4) IFS and the National Centre for Social Research (NCSR), May 2019

Banking on an inheritance?

Various patterns seem to be emerging in how wealth is transferred down the generations. It comes as no surprise that gifts and loans are more commonly made to a younger demographic. Parents are stepping in to help their offspring with times of major expense, like buying a house or getting married. Research has shown that in the last two years, 11% of those aged between 25–34, received over £500, with the average across all age groups totalling £2,000 (5).

Inheritances coming later

Across all age ranges, the average inheritance during the previous two years was £11,000. Those aged between 55 and 64 are most likely to receive larger inheritances, receiving £33,000 on average. The average amount inherited by those aged 65 and over was £20,000; this money was invested or saved by 49% of recipients.

Stand on your own two feet

With gifts often made earlier in life, inheritances could be smaller in the coming years. The research highlights that people who are dependent on receiving an inheritance instead of putting pension provision in place might find they’ve reached retirement before they inherit, so don’t neglect your own retirement plans.

(5) ONS, Oct 2018