Nobody likes giving more money to the taxman than they have to, especially when it comes to passing on hard-earned wealth to the people or causes that are close to your heart.

For that reason, placing your assets into trusts can be a tax-efficient way of minimising what inheritance tax is owed on your estate after you die - if used correctly.

You can place cash, property, land or investments into various trusts, although you will no longer be able to benefit from it because the assets will belong to the trust.

Before you get started

If you decide to set up a trust, for legal purposes you will be known as the settlor.

You then need to consider appointing a trustee, who will manage any assets you place into a trust and distribute them - or any income they may derive - to your beneficiaries.

Your beneficiaries will be the ones who stand to benefit from the income, capital or a combination of both generated from the assets placed into trust.

What trusts are out there?

Bare trusts are usually set up for children with the assets held in the name of a trustee, who looks after them until your beneficiary reaches the age of 16 in Scotland or 18 in the rest of the UK. All of the income is paid out once your beneficiary reaches this age.

With interest in possession trusts, trustees must pass on all income from any assets held in trust to a beneficiary as it arises, minus any expenses incurred by the trustee. The beneficiary who receives the income is not entitled to the assets' capital value, which goes to any other named beneficiaries.

Trustees decide how to use the income, and possibly the capital, in discretionary trusts, although this has to be in line with what you have outlined in the deed. This trust usually suits beneficiaries who are either unable or incapable of dealing with finances.

Accumulation trusts, mixed trusts, settlor-interested trusts and non-resident trusts are other options to consider. Seek professional advice on these given the complexities involved.

Trusts and tax

Placing assets into a trust can minimise the inheritance tax bill for your beneficiaries.

Seven-year rule

You must place assets into a trust at least seven years before you die for your beneficiary to obtain the full tax benefits.

If you die within seven years of the transfer and the trust is worth more than £325,000, the inheritance tax rate will be tapered as followed:

Years between gift and death Tapered relief 
Less than 3 40% 
3 to 4  32% 
4 to 5  24% 
5 to 6  16% 
6 to 7  8% 
More than 7  Nil 

Family home allowance

The residence nil-rate band, or family home allowance as it's also known, is only granted where the family home is inherited by any children, grandchildren, stepchildren, foster children, adopted children or other lineal descendants.

Discretionary trusts are excluded because the assets are owned by the trust, and managed by trustees, not the beneficiaries.

If you have placed property into a discretionary trust, you may not qualify for this tax break. However, we're happy to talk you through your options.

Capital gains

Capital gains tax only applies to your trustee(s) if the total taxable gain exceeds your trust's annual tax-free allowance of £5,850 in 2018/19. If your beneficiary is disabled or a child whose parent died, this exemption rises to £11,700.

Assets, such as property, transferred into trusts may be liable if their value has increased at the time the asset is taken out of the trust.

Speak to us about minimising inheritance tax.

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