Inheritance tax (IHT) is a tax that is levied on the estate of an individual who has passed away It is important for individuals to understand how IHT can affect their assets and estate planning, especially when it comes to discretionary trusts Discretionary trusts are a common estate planning tool used to protect assets and provide for beneficiaries in a flexible manner However, they can also have implications when it comes to IHT In this article, we will explore the impact of IHT on discretionary trusts and how individuals can navigate these complex tax implications.
Discretionary trusts are a type of trust where the trustee has the discretion to decide how and when to distribute the assets to the beneficiaries This flexibility is what makes discretionary trusts an attractive option for estate planning, as it allows for more control over how assets are distributed However, this flexibility can also have implications when it comes to IHT.
When assets are placed into a discretionary trust, they are no longer considered part of the individual’s estate for IHT purposes Instead, the assets are held in trust and are subject to their own set of tax rules One key consideration when it comes to IHT and discretionary trusts is the periodic charge that is imposed every ten years on the value of the trust assets.
The periodic charge is calculated based on the value of the trust assets at the time of the charge If the value of the assets exceeds the nil-rate band, which is currently set at £325,000, then the trustees will be required to pay tax on the excess amount The rate of tax for the periodic charge is currently set at 6%.
In addition to the periodic charge, there is also a exit charge that is imposed when assets leave the trust iht on discretionary trusts. This charge is calculated based on the value of the assets leaving the trust and is subject to a rate of 6% The exit charge can apply when assets are distributed to beneficiaries, when assets are sold from the trust, or when the trust comes to an end.
It is important for individuals who are considering setting up a discretionary trust to understand the implications of IHT on these trusts Proper planning and professional advice can help individuals navigate the complexities of IHT and ensure that their assets are protected and distributed in a tax-efficient manner.
One way to mitigate the impact of IHT on discretionary trusts is to make use of the various IHT exemptions and reliefs that are available For example, gifts made to a discretionary trust may be exempt from IHT if they fall within the annual exemption limit, which is currently set at £3,000 per year In addition, gifts made to a trust for the benefit of a disabled individual may also be exempt from IHT.
Another way to reduce the impact of IHT on discretionary trusts is to consider using a loan trust structure In a loan trust, the individual lends money to the trust, which is then invested The loan is repayable on demand, and the value of the loan is not subject to IHT This can be an effective way to remove assets from the individual’s estate while still maintaining control over the assets and providing for beneficiaries.
In conclusion, understanding the impact of IHT on discretionary trusts is crucial for individuals who are considering using these trusts as part of their estate planning Proper planning and professional advice can help individuals navigate the complexities of IHT and ensure that their assets are protected and distributed in a tax-efficient manner By making use of exemptions, reliefs, and alternative trust structures, individuals can mitigate the impact of IHT on their discretionary trusts and provide for their beneficiaries in a tax-efficient way.