According to government statistics, Inheritance tax (IHT) receipts have been rising for over a decade, and this looks likely to continue. In comparison, the number of trusts being used has fallen. Yet, Family Trusts remain one of the most effective estate planning tools to consider.
The latest HMRC statistics show that IHT collected from death transfers have almost doubled over the last 10 tax years to over £5 billion. This has been fuelled largely by rising property prices and a nil rate band that has that has been frozen since 2009.
Lifetime gifting remains a key part of tax-efficient family wealth preservation and trusts have a huge part to play in this where donors also wish to retain an element of control over the gifts, and in some cases retain some form of access for themselves.
Why is the use of trusts falling?
HMRC put the continued fall in the number of trusts down to the increase in the rate of tax on trust investments allied to the 2006 IHT changes which dragged more trusts into the world of periodic and exit charges.
The administration of trust taxation is also perceived to be complex. Trustees may need to keep accounts and file tax returns and this may incur costs. Decisions on what action to take can be based on the potential IHT savings to be made by making a gift into trust, against the ongoing tax charges on the trust together with any professional fees.
More recently, the requirement for most express trusts, whether taxable or not, to be registered with the Trust Registration Service appears to have become another barrier. While this may be an inconvenience, even if the motives behind the register are well intended, we should not blind ourselves to the wealth preservation opportunities a trust may offer.
Furthermore, the lack of control and flexibility of making direct gifts to family members may be something we are not comfortable with at the time the gift is to be made.
Which trust should I use?
Once you decide exactly how much cash you wish to gift, you may not want to make an outright gift to an individual, because you think that this person is not mature enough to use the gift wisely. Or maybe you prefer the gift to be enjoyed by a group of people, such as their grandchildren, whenever born in the future.
There are 3 types of trust for anyone looking to make a gift, each one giving differing levels of control:
Absolute trusts
Flexible trusts, and
Discretionary trusts
The name of each trust above gives a clear indication as to the starting point in identifying which is more suitable for you. Contact us today to book an appointment in the comfort of your own home to discuss your options.
Summary
Statistics show that year-on-year IHT receipts may continue to rise, despite the introduction of the residence nil rate band. Proper planning can help to reduce your IHT liability on death. As part of this, trusts remain an effective way of achieving the efficient transfer of wealth to the next generation.