Inheritance tax (IHT) is a tax on the estate (the property, money, and possessions) of someone who has passed away It is levied on the value of the estate above a certain threshold, which is currently set at £325,000.
IHT can be a significant concern for many individuals and families, as it can eat into the amount of wealth that is passed on to loved ones However, there are ways to mitigate the impact of IHT through the use of trusts.
Trusts are legal arrangements where assets are held by one party (the trustee) for the benefit of another (the beneficiary) They can be used to protect assets, manage wealth, and reduce tax liabilities, including IHT.
There are several types of trusts that can be used to reduce IHT, including:
1 Bare trusts: In a bare trust, the beneficiary has an absolute right to the assets in the trust As a result, the assets are treated as belonging to the beneficiary for IHT purposes, which can reduce the overall value of the estate subject to IHT.
2 Discretionary trusts: In a discretionary trust, the trustee has discretion over how to distribute the assets to the beneficiaries This can be useful for reducing IHT, as the assets are not considered part of the beneficiaries’ estates.
3 Interest in possession trusts: In an interest in possession trust, the beneficiary has a right to receive the income from the trust, but not necessarily the underlying assets iht and trusts. This type of trust can be used to reduce IHT by ensuring that the assets are not included in the beneficiary’s estate.
4 Will trusts: A will trust is a trust that is set up in a will and comes into effect upon the death of the testator Will trusts can be used to reduce IHT by sheltering assets from the estate.
5 Life insurance trusts: Life insurance trusts are trusts that are set up to hold life insurance policies By placing a life insurance policy in a trust, the payout from the policy can be used to pay off the IHT liability, ensuring that the estate can be passed on intact to beneficiaries.
It is important to note that setting up a trust can have legal and financial implications, so it is important to seek professional advice before proceeding A solicitor or financial advisor can help you understand the complexities of trusts and ensure that you are setting up the right type of trust for your individual circumstances.
In addition to trusts, there are other ways to reduce IHT liability, such as making gifts, using exemptions and reliefs, and taking out insurance policies Each individual’s situation is unique, so it is important to seek tailored advice to ensure that you are taking advantage of all available options.
In conclusion, IHT can be a significant concern for many individuals and families, but there are ways to mitigate its impact through the use of trusts and other planning strategies By seeking professional advice and carefully considering your options, you can ensure that your wealth is passed on to your loved ones as efficiently as possible.