Creating a trust to protect wealth

Thoughts from the Trust team

For many business transactions, Trusts could play a vital role in reducing the tax burden. The benefits during the transaction are usually quite significant, not to mention the ongoing advantages post-sale.

Lisa Wilson

Partner

Key considerations

Our client could continue to hold the shares in her personal name until she is ready to sell.
If she was to die whilst still holding the shares, under the current UK tax rules, the shares would be exempt from UK IHT as they qualify for BR.
If she sold the shares in her trading business, the cash proceeds would immediately fall under IHT and may be subject to 40% tax if held within her estate.
If she was to make cash gifts and died before seven years of the date of the gift, any funds above the available Nil Rate Band (‘NRB’), would be subject to IHT.
She may also be subject to Capital Gain tax on the disposal of the shares at a rate of up to 20%.

Summary of circumstances

Our clients have three adult children and four young grandchildren. They hold a number of assets including a family home, investment portfolio, and a rental property; total value £2.5M.

They wanted to mitigate their IHT exposure and pass on some of their assets to their children, whilst protecting their wealth.

They have a significant estate and have not yet utilised any available allowances or reliefs. They both have a Nil Rate Band (‘NRB’) of £325k each. Due to the value of their estate however, they are not eligible for the Residence Nil Rate Band (‘RNRB’) of £175k each.

Creating a trust to protect wealth

We worked with our clients to assist them in mitigating their IHT exposure whilst protecting their wealth.

Make gifts to the children up to their joint NRB without any immediate IHT implications. However, if Mr and Mr X die within seven years of the gift it will be subject to IHT.
Direct gifting it takes the control away from Mr & Mrs X.
Transfer the rental property into their children’s names so that the rental income can be taxed on the children and used in the future to fund the grandchildren’s school fees. This will give an immediate income tax saving where Mr & Mrs X are higher rate taxpayers and their children are not. However, the gift will be subject to Capital Gains Tax (‘CGT’) and again removes any control from Mr and Mrs X.
The above actions would reduce the value of their estate below £2m ensuring they were eligible for the RBRB.
The assets are owned by the children so at risk of being claimed in the event of a divorce, bankruptcy or when considering future care costs.

Without a Trust

Impact with a Trust

Gift the rental property into trust. The rental income will be distributed out to the beneficiaries if needed. No IHT on the gift into trust as there is an available NRB. The Capital Gain on the transfer of the property can be held over and deferred until a later sale of the asset thus avoiding an immediate CGT charge.
Invest any remaining funds into an AIM portfolio. After holding this for two years, it would qualify for Business Relief (‘BR’) and could be transferred into the trust with no IHT implications.
The trust could provide income for the grandchildren’s school fees.
This planning would reduce the value of their estate below £2m which would mean they were eligible for the RBRB
More importantly, Mr and Mrs X retain complete control of the assets by being Trustee of the trust.
The assets are protected and cannot be claimed by disgruntled ex-partners in a divorce case or where the child was in financial difficulty.

What are the options?

Ready to take the next step?

Trusts offer a structure that protects your asset, allows you to retain control and evolves as the things that matter to you change. Amidst the backdrop of an ever-changing taxation landscape, they offer the flexibility that many individuals require.