Many people feel that trusts are scary or overly complicated, and believe they’re only used by the extremely wealthy. While trusts are indeed common among high-net-worth families, you don’t need to be a millionaire to benefit from them.
If your total assets exceed £500,000, a trust could be a valuable solution for tackling your inheritance tax (IHT) exposure.
Everyone has a nil rate band of £325,000, meaning the first £325,000 of your estate is free from IHT. Many people also qualify for the additional £175,000 residence nil rate band when passing their main home to children or grandchildren.
However, anything above this combined allowance (potentially £500,000 per person) is likely to be subject to 40% inheritance tax.
Gifting can help ease financial burdens for families, but for some, establishing a trust may offer a more flexible solution. Unlike a direct gift, a trust allows you to retain control over the assets while also enabling you to pass them on to minors who are too young to legally own them outright.
A common example we see at DY involves grandparents placing a rental property into trust for their minor grandchildren. After seven years, the trust benefits from its own £325,000 nil rate band, which could save up to £130,000 in IHT.
There are also additional income tax benefits. Once the asset is placed in trust, rental income can be distributed at the grandparents’ discretion to their grandchildren. This allows the grandchildren to use their own tax-free personal allowance of £12,570, which can be more tax-efficient than the grandparents paying tax at their higher marginal rates.
If you believe a trust could be beneficial for you or your family, we are here to assist. Our team offers informal, no-obligation meetings to discuss your options and help you determine if a trust is the right choice for your estate planning needs.
