Trusts and Inheritance Tax Planning A Priority for Any Responsible Estate Owner

1. Trusts and Inheritance Tax Planning: A Priority for Any Responsible Estate Owner In itself, life is a beautiful gift that should be enjoyed to the fullest and that can leave its mark on the financial development of our descendants. Perhaps you are not currently thinking about what will happen with your possessions after you pass, or even worry too much about how your children and spouse fare after your passing. However, unfortunately, dying is a natural part of the life cycle, and the responsible thing to do is ensure that your descendant benefits from all the necessary financial resources to continue their activities without facing the persecution of the governmental authorities. Are you based in the UK? Are you the owner of an estate with a cumulative monetary value exceeding £325,000? In that case, you should invest in trusts and inheritance tax planning, as after your passing, your descendants will be subjected to a 40% tax on each amount that exceeds that threshold. Let’s say, for example, that the estate you leave behind is worth somewhere around £500,000. In that case, the state will tax your successors with 40% of the difference between your calculated assets value and the ril-rate-band, which currently stands at £325,000. So, they will need to pay around £90,000. Inheritance tax is somewhat unfair, as the values of estates can rise over time, regardless of the financial status of your descendants. As an example, a house bought in East London for £150,000 fifteen years ago will be worth significantly more in the present, which is both good news and a financial conundrum for your successors, as for an estate that’s worth £1.5 million, the inheritance tax they’ll need to pay will exceed their current financial possibilities. So, they will probably be forced to sell the property only to pay off their financial obligations.

2. A Trust Company Can Find Ways Around IHT It’s reasonable to be interested in trusts and inheritance tax planning, as, in your lifetime, you probably already paid taxes on your registered possessions, and the last thing you want is for your children to face extra financial difficulties after your passing. Alas, in the UK, inheritance tax obligations can be significantly reduced both through residence nil-rate band allowances and by setting up trusts. Let’s start with the RNRB. In the UK, the standard IHT threshold is currently set at £325,000, which means that any estate worth less than that is not subjected to IHT. But there’s a catch. If you leave your estate to a direct descendant (your son, for example), he will most likely be eligible for a supplementary tax allowance that, as of January 2025, is currently set at £175,000. So, realistically, since most of us leave our estate to a direct descendant, IHT comes into play only if the total value of our estate exceeds £500,000. The residence nil-rate band is a fantastic aid for middle-class families that don’t necessarily benefit from the financial resources required to afford IHT taxing. However, even in the case of RNRB, there are thresholds. For example, is the estate you’re leaving behind worth more than £2 million? Then, for every two pounds that exceed the £325,000 threshold, your total RNRB allowance will be reduced by one pound. Therefore, if you are left with a valuable estate, the best thing you can do is leverage the services provided by a company specialised in trusts and inheritance tax planning. How Else Can a Trust Company Help? For one thing, the trust company you call will analyse the total value of your estate and note any ongoing liabilities that might reduce its taxable monetary value. Your tangible assets can, for example, be worth more than £325,000. However, if you are also dealing with ongoing financial obligations like a mortgage, the taxable estate value might be modified. The locally- based trusts and inheritance tax planning company you call might also advise you to combine

3. your tax-free allowance with that of your partner, which can potentially increase your estate’s IHT threshold to a value of £1 million. One strategy that will be considered by the trusts and inheritance tax planning company you call is also to utilise the 7-year rule applicable to gifts or assets provided to your direct descendants. According to UK laws, estate owners are allowed an annual gifting allowance of £3,000, which can add up, especially if you start with this practice early on. However, if you die within 3-4 years after making the gift, your descendants will be taxed for 80% of the gift’s monetary value. Finally, one last solution to minimise your estate’s IHT is to donate 10% of it to a charity, which can reduce its IHT rate from 40% to 36%. However, by a long shot, the best way to reduce or eliminate inheritance tax law in the UK is to utilise the expertise of a trust company. How Can You Use a Trust Company and What Is a Trust? As a simple explanation, trusts are a legal relationship in which the owner of tangible assets transfers its ownership rights over those assets to a third party, which will act as a custodian and, at the moment of the owner’s passing, transfer the right over the estate to its descendants. When you transfer your assets to a trust, they are technically no longer part of your estate and, therefore, are no longer taken into consideration when calculating the IHT obligations of your descendants. There’s a catch, however: the same 7-year rule applies even for assets transferred between estate owners and trusts. So, if you die within seven years after shifting your ownership rights, the estate might still be subjected to IHT. In the UK, trusts can be separated into four categories (they are not the only ones, however): Bare-trusts, pilot trusts, interest in possession trusts, and discretionary trusts. Bare trusts are the most straightforward trust type, as the beneficiary has 100% rights over the asset. For interest interest-in-possession trusts, on the other hand, the beneficiary has rights from the income generated by the trust but not necessarily to its capital.

4. Pilot trusts are used to distribute assets to multiple beneficiaries, while discretionary trusts don’t give beneficiaries absolute rights to the estate assets and are also subjected to a 6% tax every decade for estate values that exceed the IHT maximum threshold. What option is appropriate for your situation will depend on multiple factors that will need to be considered by the trust company you employ. That said, when it comes to IHT avoidance, trusts are the best tool to reduce our descendant’s financial obligations.