Inheritance tax (IHT) is a tax that is levied on the estate of someone who has passed away It is important for individuals to plan their estates in a tax-efficient manner in order to minimize the impact of IHT One common estate planning tool used to reduce the tax liability on an estate is the creation of discretionary trusts.
A discretionary trust is a legal arrangement where assets are held by trustees for the benefit of a group of beneficiaries The trustees have the discretion to decide how the assets in the trust are distributed among the beneficiaries This flexibility allows for greater control over the distribution of assets and can be useful in estate planning to protect assets from IHT.
When assets are placed in a discretionary trust, they are considered as being “outside” of the estate of the person who set up the trust This means that these assets are not included in the calculation of the value of the estate for the purposes of calculating IHT As a result, placing assets in a discretionary trust can help to reduce the overall IHT liability on an estate.
However, it is important to note that assets placed in a discretionary trust are subject to their own set of rules when it comes to the taxation of the trust In some cases, IHT may still be payable on assets held in a discretionary trust The rules surrounding IHT on discretionary trusts can be complex and it is advisable to seek professional advice when setting up a trust to ensure that it is done in a tax-efficient manner.
One key consideration when it comes to IHT on discretionary trusts is the concept of the “relevant property regime” iht on discretionary trusts. This regime governs the way in which assets held in a discretionary trust are taxed and is based on certain key dates in the life of the trust.
The initial charge on a discretionary trust occurs when assets are placed into the trust and every 10 years thereafter At these points, IHT is payable on the value of the trust assets in excess of the nil-rate band, which is currently set at £325,000 The rate of tax payable on these occasions is 20%.
In addition to the 10-yearly charge, there is also an exit charge that may be payable if assets are distributed from the trust to beneficiaries The amount of the exit charge is calculated based on the value of the assets distributed and the length of time that the assets have been in the trust The rate of tax payable on the exit charge can be as high as 6% in some cases.
Furthermore, when assets are distributed from a discretionary trust, they may be subject to a further charge known as a proportionate charge This charge is levied on the value of the assets that are distributed and is calculated based on the value of the assets in the trust at the time of distribution.
It is important to carefully consider the tax implications of setting up a discretionary trust and to work with a professional advisor to ensure that the trust is structured in a tax-efficient manner There are various strategies that can be used to mitigate the impact of IHT on discretionary trusts, such as the use of multiple trusts or the gifting of assets over time.
In conclusion, while discretionary trusts can be an effective tool for reducing the impact of IHT on an estate, it is important to be aware of the potential tax implications of setting up such a trust Working with a professional advisor can help to ensure that the trust is structured in a tax-efficient manner and that assets are protected for future generations.