Inheritance Tax (IHT) can be a complex and sometimes overwhelming topic, especially when it comes to trusts One common type of trust that individuals may encounter is a discretionary trust Discretionary trusts can be an effective way to pass on assets to loved ones while still maintaining a certain level of control over how those assets are distributed However, when it comes to IHT, discretionary trusts can also present some challenges In this article, we will delve into the intricacies of IHT on discretionary trusts and provide some insight on how to navigate this terrain.
First and foremost, it’s important to understand the basics of IHT In the UK, IHT is a tax that is levied on the estate of a deceased person This includes all of the assets and property that they owned at the time of their death The current IHT rate is 40% on estates valued above the nil-rate band, which is currently set at £325,000 Assets held in trusts are also subject to IHT, including discretionary trusts.
So, how does IHT apply to discretionary trusts? When assets are put into a discretionary trust, they are essentially being gifted to the trust Depending on the value of the assets being put into the trust, IHT may be due at this point This is known as the “entry charge” The rate of IHT for the entry charge is also 20% for trusts valued above the nil-rate band.
In addition to the entry charge, there are other potential charges that may arise in relation to discretionary trusts For example, there may be a charge every 10 years on the value of the trust’s assets that exceed the nil-rate band This is known as the “10-yearly charge” and is also taxed at a rate of 20% iht on discretionary trusts. Furthermore, if any assets are distributed from the trust, there may be an “exit charge” on the value of those assets, which is again taxed at 20%.
It’s worth noting that there are some exemptions and reliefs available when it comes to IHT on discretionary trusts For example, there is a small gifts exemption, which allows individuals to make small gifts of up to £250 to any number of people each tax year without incurring any IHT Additionally, there is an annual exemption that allows individuals to give away up to £3,000 in total each tax year without being subject to IHT This amount can also be carried forward to the following tax year if it is not used.
Another important consideration when it comes to IHT on discretionary trusts is the role of the trustees Trustees have a duty to manage the trust in the best interests of the beneficiaries This includes ensuring that any IHT liabilities are paid from the trust’s assets when they fall due Failure to do so could result in penalties and interest being charged by HMRC.
There are also some planning opportunities available to mitigate the impact of IHT on discretionary trusts For example, individuals can consider making gifts into trust during their lifetime rather than waiting until death This can help to reduce the value of their estate for IHT purposes and potentially lower the overall tax liability Additionally, individuals can explore the use of exemptions and reliefs, as mentioned earlier, to help minimize the IHT payable on the trust.
In conclusion, IHT on discretionary trusts can be a complex and challenging area to navigate It’s important to fully understand the rules and regulations surrounding IHT and trusts in order to ensure compliance and minimize tax liabilities By seeking advice from a professional advisor and exploring planning opportunities, individuals can take steps to protect their assets and provide for their loved ones in the most tax-efficient manner possible.