We are referring here to trusts created in your lifetime (ie not within a Will structure which only becomes acting on death). There are various reasons why people consider Lifetime Trusts. Often, they are used to best facilitate a gift of money or property to children/other persons. Also, it could be used to protect the family home from third party ‘attack’ and outside of the estate and outside of the scope of a later change in Will.
Advantages can include:
- Assets or value in trust are often outside of the ‘Will’ environment and thus more protected (as against changes in Wills in later years).
- Therefore, it helps to crystalise your wishes now (rather than being subject to changing arrangements and vulnerability in latter years to changing Wills and change destination of assets).
- The structure could help reduce the net value of their estate for any future ‘probate tax’ increase that comes in and could help the claim of RNRB allowances;
- To date, there was little required in terms of administration of the trusts (the value being usually held on lifetime loans or life interests between the couple);
- For many, there is no trust tax or IHT payable to date;
- As a result, there has been relatively little cost of administration to date.
- Therefore, as structures they are administratively ‘light’ and to date not incurring much in the way of administration cost as well as often being subject to tax.
Updates
There have been some changes in scope and legislation tax-wise and it is worth us reviewing the structure to ascertain what is best for you and your estate planning.
Options currently include:
- continuing with the Lifetime Trusts as currently drawn;
- terminating the Lifetime Trusts with or without creating newer structures;
- amending the Trusts to specify or deal with certain assets in a specific way;
If the purpose of setting up Lifetime Trusts was IHT planning, then HMRC has advised that mutual operations between spouses, which remain mutual, may not qualify the Trusts for IHT relief even where 7 years passes from the date of the Gifts into Trust. The issue will succeed or fall on the merits of each Trust and circumstances. If this is of concern to any of our clients, please make an appointment to discuss this with us so we can explain our interpretation of the current legislation. We have found that in the majority of matters reviewed, clients are still wishing to continue with the trusts as currently drawn with only minimal updates and changes required.
If IHT is a factor for you, then as part of our next review, please ask us to draw up an IHT Calculation Estimate – it can deal with the appropriate likely tax treatment of your lifetime trusts, the available Reliefs and what other ways there are to mitigate the effects of IHT.
Taxation of Lifetime Trusts
When you commence a Lifetime Trust, the value of capital or assets passed into the Trust by gift are taxed at 20% above £325,000 passed into Trust. Hence, the majority of Lifetime Trusts we have created for our clients are capped at a value of £325,000 per person. The 20% tax rate has remained unchanged for some time now. Trusts that have over £325,000 in value are taxed at 6% every 10 years from the date of the creation of the Trust and upon termination there is a final 6% maximum charge.
Administration and Registration Requirements
HMRC have brought in requirements that originate from an EU-wide agreement for greater transparency in disclosure of company and trust structures (to which the UK have subscribed notwithstanding us now having left the EU). The requirement is to register with HMRC all Trusts of value exceeding £100 or where there is tax due or likely to be due. If this applies to an existing Trust we are managing for you, we will be in contact further to confirm the process of registration. It is not particularly onerous – it is a due diligence requirement and to ensure transparency.
Lifetime Trusts – and helping to claim the Residence Nil-Rate Band (RNRB) IHT relief
If your overall Estate exceeds £650,000 (between a couple) but does not exceed £2.7m then your Estate may be eligible for IHT additional relief provided by the RNRB. We have found that creating lifetime trusts can be useful to ensure that estate values are reduced in net value terms such that more RNRB relief is available.
If you do not have any form of Lifetime Trusts to date:
There are still some very good reasons for considering them.
(a) For couples who have overall estates not likely to exceed £650,000 but include a property asset.
Consider putting the property ownership into Trust. It would take the capital asset outside of your willed Estates and make it more protected from third-party attack. We would suggest this usually suits couples at retirement age or older looking to protect their main asset for their children, but it can apply to any couple; or
(b) For couples who have overall estates over £650,000.
Consider creating a Trust for the reasons above but it should not be specifically for IHT purposes as the benefit is more limited than previously envisaged some years ago. Nevertheless, our view is that the benefits of establishing the Lifetime Trusts in terms of flexibility and adaptability to changing laws and taxation outweigh the negatives; or
(c) For anyone wishing to make a Gift to a person but who is worried about attack on those assets from a third party.
A typical example is a parent wishing to gift a sum of money, say £50,000 to a child to assist them with a deposit on a property they are buying with a new partner. The wish is to protect the gift for that child against possible future claim on divorce etc. A Lifetime Trust provides the legal vehicle to advance the money to the child (usually by a loan advancement) so that the child owes the value back to the Trust on demand. That allows the child the full access and use of the money (just like a gift to the child would do) but with the protection for that child against third-party attack. It also provides good IHT protection for the child’s own estate, ie the value of the loan advancement does not ‘add’ to the value of the child’s own assets.
If you’d like a chat to see how I can help, please get in touch.