BLOG SIFA News – The value of on-shore trustsNovember 1, 2017 9:58 am
On-shore trusts were very popular for family wealth planning until 2006, when inheritance tax law was changed.
Until that date, the only transfers of assets into trust which incurred a charge to tax were transfers into discretionary trusts, which give trustees the right to select the beneficiaries. Now, any transfer into trust other than a bare trust, which is tantamount to a direct gift, is a chargeable event.
However, no tax will be payable if the value of the transfer is less than the £325,000 “nil rate band” for IHT and the person setting up the trust survives for seven years after doing so. Tax will only be charge if the “settler” dies within the seven years.
This would allow grandparents each to put into trust money or financial assets worth £325,000, for example for their grandchildren’s education. In addition, if they had not used their annual allowance of £3,000 for the previous two years, they could top up the £650,000 transfer by £6,000 each, producing a total gift into trust of £662,000.
With IHT at 40%, this could result in a saving of £164,800 compared with the situation if the assets transferred had remained in the grandparents’ estates; and if they survived the gift by seven years, they could do the same again.
There would of course be charges for administering a trust, which might amount to £3,000 per year, but the trustees might be able to claim income tax relief on this expenditure.
The greatest advantage would be gained from gifts into trust if these were made by grandparents, but it would be equally possible for parents to make the gifts, subject to the important caveat that they should not access the trust funds for the benefit of their children before the children reach the age of 18. To do so would result in a tax charge to the parents.
Tax advantages are not the only reason for setting up a trust. Importantly, trusts provide the means of protecting beneficiaries against themselves. Young beneficiaries have often been led astray when entrusted with money at a time when they are ill-equipped to make responsible financial decisions. Settlers may also wish to avoid the consequences of beneficiaries becoming involved in divorce squabbles.