Trusts to pass on £ to kids, minimising IHT.

MC1R

Hi all,
With pensions falling within your estate now. Are trusts a tax/IHT efficient way to pass on £ to kids if you stay within the threshold every 7years? 

I know that may also be a decade-ly  charge but it sounds minimal compared to IHT.

Thanks in advance. 

M

poseidon1

The appeal and attraction of trusts created during lifetime were damaged considerably in March 2006 when rules related to interest in possession trusts was aligned with discretionary trusts.

As result one is now limited to creating trusts up to the prevailing NRB ( £325,000) to avoid a 20% lifetime IHT charge. You are correct that on each 10th anniversary, if the value of the trust exceeds the NRB prevailing at the time, then there is a 6% charge imposed on that excess. That does leave scope for separate husband and wife trusts at £325k each, so £650k in total.

As an example if a trust is valued at £500k 10 years later, and NRB still unchanged at £325K, IHT charge on the trust would be £10,500. Double that if husband and wives NRB trusts were initially created. A useful quirk to note, if the trust is fully distributed within 90 days after the 10th anniversary there is no IHT exit charge at all

So yes lifetime trusts for those that have very significant liquid assets, remain viable subject to staying within NRBs at time of creation. 

 However be careful about the underlying investments. Conventional investments in stocks and shares generating income, attracts income tax at 45% and CGT at the prevailing top rate, but with only 50% of the personal cgt allowance ( £1500) available.

Also worth noting that a conventional portfolio attracts onerous annual accounts preparation and annual trust tax compliance, so this administration best performed by a qualified accountant ( at a cost)  if you don't have the skill sets.

That said trust running costs  and excessive income tax  /cgt on these trusts, can be mitigated by using life company  investment bonds instead of conventional stocks and shares.

MC1R

Thanks for that poseidon1. 👍🏼