Lifetime Trust

Trusts created during lifetime are an efficient way of potentially mitigating UK Inheritance Tax (IHT) for both the settlor and the beneficiaries of the trust.

Many are concerned about the affect of IHT and some are taking action early to avoid the tax liability on “surplus” assets. However, there are real concerns about making immediate outright gifts to certain family members. Factors such as potential divorce or bankruptcy of the recipient or that they are too young to sensibly manage large sums of money can mean that the gift is lost or significantly diminished over a short period of time.

A gift into a Lifetime Trust can overcome these concerns and protect the funds both from tax and unfortunate family situations. You can also maintain an element of control over the funds and decide who benefits from time to time. Such a gift into a trust during your lifetime is free from inheritance tax provided that it is below the “nil rate band” and you have not made similar gifts in to a trust in the last 7 years. Any amount in excess of the “nil rate band” is subject to tax at a lifetime rate of 20%.

It is important to note that, in order to obtain the maximum tax benefit, you must survive seven years after the creation of the trust and cannot benefit from the trust yourself. You must take care not to settle assets to which you may still derive some benefit (e.g. the family home).

However, a Lifetime Trust can ensure that you can efficiently remove assets from your estate for inheritance tax purposes and allow your family to benefit from the funds at a time when you feel is right. This allows you to maintain control and protect the funds from divorce, bankruptcy or misjudged investment.

The advantages are numerous:

• Any assets, or part share of assets, can be settled on trust (subject to a review of any taxation consequences);
• IHT saving on death, 7 years after creation;
• IHT saving can be doubled with careful inter‑spouse planning (each spouse has their own nil rate band);
• Flexibility. A large number of beneficiaries can be included and the trustees can decide who can benefit at a later date;
• Maintenance of control. You can be a trustee or direct the trustees with a Letter of Wishes;
• The trust can be an effective way to “skip” a generation and avoid or reduce an IHT liability on the death of each generation;
• Potentially make use of several IHT and CGT allowances (particularly if there are children in the class of beneficiaries – useful for school fees and other maintenance expenses).