I was asked today by a client why you would use a UK trust bearing in mind the tax charges that are incurred. I put together a note on the subject, but thought it might make sense to include that here for the world to see:
UK Trusts have their own IHT regime, with discretionary trusts taxed under the ‘relevant property rules’.
In simple terms these charge entry taxes at 20% on placing assets into trust, 10 year charges at 6% on every anniversary and then exit charges at 20% pro-rated according to the time since the last 10 year anniversary (so 2 years after an anniversary the rate is 2/10 x 20% = 4%). However, each of these charges has a tax exemption of £325,000 per settlor.
Most trusts are set up under £325,000 (£650k for couples) to avoid the initial 20% charge. Just to confirm the £325,000 is per settlor, not per trust, so you can’t put £325,000 in 10 trusts.
So if you have a trust set up by husband and wife which grows to £1m on it’s 10th anniversary, it would be taxed on £1m-£650,000 x 6% = £21,000. However, this has removed £1m from the family estate saving £400,000 on death. This is charged every 10 years, but assuming the trust value stays at £1m then it would take 20 charges (200 years) to cost more than the IHT charge on a single generational death.
Even with larger trusts of say £10m the 10 year IHT charge is ‘only’ £561,000 which is 1/7th of the 40% charge on death.
It also gives wealthy families a manageable and predictable tax charge, unlike a situation where grandad personally owns a £10m share portfolio and might live for 20 years but might die tomorrow with a £4m tax bill.
Obviously grandad (70) could gift the shares (probably subject to meaningful CGT) to his kids (50), but whos to say they won’t have a heart attack the day after. Putting it in trust means you don’t have to worry about unexpected death and also takes it outside of people’s estate for divorce/creditor purposes and allows you to spread income across different family members and different generations (paying for school fees etc).
If you want to know more reach out to me: