IHT Q&A: 'The Trust Rush'

The recent Budget introduced several significant changes to Inheritance Tax (IHT). Notably, pension pots will now be included in IHT calculations, and the IHT nil-rate band, which has been set at £325,000 since 2009, will remain frozen until 2030.

Another major change is the capping of Business Property Relief (BPR) and Agricultural Property Relief (APR) at £1 million for 100% relief, with any value above this only receiving 50% relief. 

Given these developments and the growing interest in setting up trusts, I recently spoke with The Times newspaper’s Money desk for a piece entitled ‘The Trust Rush’ to explore some of the issues.

Here are the questions along with my responses.

Q. Who are the clients you are seeing an increased interest in setting up a trust? Are they ordinary families and what sort of assets are they placing in trust? What has spurred them to do so? 

We’ve seen an increase in setting up trusts from many different types of client.  Whilst tax isn’t the motivation for every single trust that is created, many clients want to reduce their tax exposure by giving assets away but aren’t quite ready to pass them straight to the younger generation.  Before the Budget, many clients were anticipating a hike in capital gains tax rates and so wanted to capture the current rates of CGT by gifting assets into trust that they no longer needed but which had risen significantly in value.

Significant IHT changes to Business Property Relief (BPR), Agricultural Property Relief (APR) and pensions were announced in the Budget.  Whilst we don’t yet have all the detail, the conversations with clients have already started to see what options they have to reduce their IHT exposure in a way that provides for their families whilst protecting their own financial security.

Q. What are the costs involved with setting up and running a trust? 

It’s not a very helpful answer but it depends!  It depends on the type of trust, the value and type of asset being gifted to the trust and how active the trust is in terms of its day-to-day administration.  As well as the legal advice, there will be some level of annual tax reporting and trust administration to do, formal valuations of the assets may be needed and there will be management costs for looking after assets such as property and investments.  The initial advice should always weigh up the tax and asset protection advantages of a trust with the costs of setting it up and running it.  The role and responsibilities of being a trustee should not be overlooked either as they can ultimately be personally liable for mistakes made.

Q. Are clients opting for bare or discretionary trusts? 

A bare trust is ideal for the client who wants to give away an asset to, say, their child and is happy that it belongs to that child for all tax and capital assessment purposes.  The parent can continue looking after the asset on the child’s behalf but, once the child is 18, must transfer it into the child’s name at their request.   

The moment the client wants more control over when the child and other beneficiaries can access the asset or wants to protect it against third parties who could bring financial claims against the child (in the event of financial difficulties or a divorce), the conversation turns away from a bare trust and towards the more flexible, typically discretionary, trust.  These are far more adaptable to changing circumstances but do come with their own tax regime.

Q. And have you had any farmer clients wanting to set up a trust?  

Trusts have played an important role in the structuring of farming business and non-farming businesses and will continue to do so.  The changes to APR and BPR will increase the IHT bill on the death of many farmers and business owners who keep these assets and so, to reduce the tax, they need to start their succession planning early to pass assets down a generation and in the right way for their particular family and enterprise.

To find out more visit the Inheritance Tax Planning section of our website here.