Inheritance tax (IHT) is a concern for many individuals who wish to pass on their wealth to their loved ones. With the current threshold set at £325,000 per individual anything beyond this amount is taxed at a rate of 40%. However, with careful planning and the use of trusts, individuals can significantly mitigate their inheritance tax liabilities, ensuring that more of their wealth is preserved for future generations.

Understanding Trusts

Before delving into how trusts can help mitigate inheritance tax, let’s first understand what a trust is. A trust is a legal arrangement in which assets are transferred to a trustee, who manages them on behalf of beneficiaries. Trusts can be established during the lifetime of the individual or through their will upon their death.

How Trusts Mitigate Inheritance Tax

Lifetime Gifts: One of the most common strategies to reduce inheritance tax is to make lifetime gifts into trusts. By transferring assets into a trust during one’s lifetime, the value of those assets is immediately removed from the individual’s estate for inheritance tax purposes, provided certain conditions are met. This can be particularly advantageous if done early, allowing the assets to appreciate outside of the individual’s estate.

Utilising the Nil-Rate Band: Each individual in the UK has a nil-rate band, currently set at £325,000, which is the threshold before inheritance tax is applied. Married couples and civil partners can effectively double this allowance, as any unused portion of the nil-rate band from the first spouse or partner to die can be transferred to the surviving spouse or partner. Trusts can be structured to utilise these allowances effectively, ensuring that as much of the nil-rate band as possible is utilised.

Setting Up Discretionary Trusts: Discretionary trusts offer flexibility and control over the distribution of assets, allowing trustees to distribute assets to beneficiaries as they see fit. By creating discretionary trusts in their wills, individuals can ensure that their assets are protected and that inheritance tax is minimised. This is particularly useful for individuals with complex family dynamics or those who wish to provide for future generations.

Business Property Relief and Agricultural Property Relief: Certain types of assets, such as business interests and agricultural property, may qualify for relief from inheritance tax. Placing these assets into trust structures that qualify for these reliefs can result in significant tax savings. However, it’s essential to seek professional advice to ensure that the necessary conditions are met to qualify for these reliefs.

Charitable Trusts: Establishing charitable trusts can also be an effective way to mitigate inheritance tax. Assets transferred to a charitable trust are exempt from inheritance tax, and individuals can also benefit from reduced rates of inheritance tax if they leave at least 10% of their estate to charity.

Inheritance tax can significantly erode the wealth that individuals have worked hard to accumulate over their lifetimes. However, by utilising trusts effectively, individuals can minimise their inheritance tax liabilities and ensure that more of their wealth is preserved for their beneficiaries. It’s crucial to seek professional advice when considering trust planning to ensure that the most appropriate strategies are implemented based on individual circumstances and objectives. With careful planning and the use of trusts, individuals can leave a lasting legacy for their loved ones while minimising the impact of inheritance tax.