IHT and Discretionary Trusts

MarzipanCrumble

Not sure this is the correct forum but IHT does come up quite often as a thread.

My estate will be liable for IHT when I die.  What are the advantages and/or disadvantages of a Discretionary Trust?  And why should I or shouldn't I set one up for adult children?

Keep_pedalling

Frankly I would not touch one of those with o long barge poll. DTs are a pain to manage for the trustees and are subject to some eye watering levels of taxation.

Putting your surplus savings into a DT can reduce your IHT liability if you survive for 7 years but the trust income would be subject to tax and the capital to CGT. Why would you not simply make gifts to your children rather than complicate their lives with a trust?

poseidon1

Discretionary trusts can protect your accumulated wealth from:

* Children's  marriages ending in divorce
* Children's bankruptcy

However as advised,  and depending on choice of trust assets there is a  price to pay with regard to high rates of income tax ( 45% but partially recoverable by 20% tax paying beneficiaries where trust income distributed each year ) ; capital gains tax  on realised trust profits but with only 50% of the personal cgt allowance available;  IHT at 6% of the trust value  exceeding the prevailing nil rate rate band,  on each of the trust's 10th anniversaries.

With such a complicated web of taxes, accurate record keeping via preparation of annual trust accounts should be considered mandatory, hence annual accountancy fees as well as tax compliance by a competent professional.

That said, some of these disadvantages (annual income tax / cgt) can be avoided by investing in life company single premium investment bonds, but 10 year iht remains in point, and investment bonds  have their own tax peculiarities which require careful  management.

Discretionary trusts do have their uses, but for most families the admin costs and tax complexities probably outweigh the benefits.

MarzipanCrumble

"That said, some of these disadvantages (annual income tax / cgt) can be avoided by investing in life company single premium investment bonds, but 10 year iht remains in point, and investment bonds  have their own tax peculiarities which require careful  management." #poseidon2

Yes, that.  Got two of those, one of which would go into DTrust