Are UK trusts planning of the past or fit for the future?

Depending on who you talk to you can get a very different view on whether trusts still have a place in tax planning of today. 

Common myths we hear surrounding trusts include:

  • trusts are outdated and do not have a place in current tax planning;
  • trusts are not needed in Wills now we have the transferrable nil rate band;
  • trusts are complex and expensive to run; and
  • trusts are a vehicle for tax avoidance. 

Whilst trusts do have their own tax regime, which inevitably brings a level of complexity, if used in the right situations and managed correctly they can still be a very useful vehicle when considering how to structure your affairs in a tax efficient manner during your life and on death.

Trusts continue to not only bring certain Inheritance Tax benefits, their flexibility around how family wealth can be distributed is a key driver as to why settlors consider a trust. These factors coupled with the control over the capital that can be retained by the trustees, which often include the settlor, can make trusts a very attractive prospect.

Why use a trust?

There remains to be many reasons why trusts should be one of the areas explored when tax planning is on the agenda these include:

  • people living longer can result in parents creating an Inheritance Tax problem for their children by leaving them a large inheritance when they are already wealthy. Trusts can give trustees the flexibility to retain or distribute an estate according to the beneficiaries needs; 
  • parents and grandparents are increasingly helping children and grandchildren financially and trusts can have a place in helping set money aside for this purpose;
  • in modern society family structures are ever more complex and planning is often needed to protect wealth on occasions such as second marriage where there are children from the previous relationship;
  • complexity around transferrable nil rate bands can mean that trusts in Wills remain important, so all available reliefs and allowances are fully utilised; and
  • Trusts to hold business assets can ensure certain reliefs such as Business Property Relief are maximised. 

Conclusion

Recent research undertaken by HMRC concluded that Settlors of trusts generally had very limited knowledge of the trusts that they had set up, and this therefore impacted how effective their trust was in meeting their objectives. This highlights the importance of taking the right advice when considering not just a trust, but any tax planning, to ensure that it is right for you and that any planning that is executed is managed correctly and reviewed regularly so that it remains fit for purpose.

For more information please get in touch with Joan Foster.

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