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Trusts &
Inheritance Tax

What is a Trust?

A trust is the formal transfer of assets to one or more people, known as trustees. The trustees are legally responsible for managing the assets on behalf of beneficiaries – people who benefit from the trust. The details of the arrangement are set out in the trust deed. Trusts aren’t new – far from it! In fact, Trusts were first mentioned by Homer circa 650BC. In the UK, their origins can be traced back to the Norman Conquest of 1066, after which the common law of England was created. There are various types of trust. Some take effect during the lifetime of the settlor – the person who sets up the trust. Others become active on the death of the settlor and are referenced in their will. This factsheet only discusses trusts established during your lifetime. Different types of trust have different advantages and disadvantages for the settlor and beneficiaries, and different legal responsibilities for the trustees.

Why use a Trust?

You’d use a trust to ensure that assets you originally owned are managed for the benefit of other people – the beneficiaries. Doing this protects the assets because they’re not legally owned by the beneficiaries. That way, they can’t be eroded if the beneficiaries get divorced, go bankrupt, or are subject to claims from creditors. If beneficiaries need long-term care in the future, assets held in trust cannot be assessed to pay for that care. Another good reason to set up a trust is to ensure that an inheritance is managed on behalf of a vulnerable beneficiary. Because assets in the trust don’t add to their estate, it won’t impact their entitlement to benefits. Finally, because assets in trust don’t add to a beneficiary’s estate, they won’t form part of their estate for inheritance tax purposes.

Very few clients want to pay tax to the treasury. Even fewer would like to leave the burden of inheritance tax to their children or other beneficiaries. The good news is there a diverse range of planning options available. By carefully organising your assets, and without having to lock them so tightly you cannot access them, we can minimise or even completely avoid any inheritance tax due on your estate.

A common and legal way to help avoid this is through the use of trusts

We are specialists in advising and then arranging for the setting up of trusts to fulfil an individual's requirements and their wishes for their beneficiaries. A trust can take effect only when you die, and / or it can protect your assets while you are alive. Usually our clients want to protect their assets from inheritance tax or from other negative situations, some of which are listed below. Our asset protection trust can solve many legal problems commonly encountered by our clients. For example, it can potentially: - ​protect against a beneficiary inheriting at a potentially inconvenient time, such as during a divorce or bankruptcy; - remove the need for probate: assets held within a trust are not subject to the costly and time-consuming probate procedure; - avoid creating an inheritance tax burden for your children or other chosen beneficiaries; - help to avoid a child or other relative making a claim under the Inheritance Act 1975; - ensure family members are not disinherited against their wishes (for example if your spouse or partner remarries).

There are many different types of trust, so we select and tailor them so they're exactly right for you and your family. They include:


Property Protection Trusts

Settlor Excluded Asset Protection Trusts (SEAPT)

Flexible Life Interest Trusts (FLITs)

House with Pool

Property Protection Trusts

Many of us work very hard throughout our lives with the goal of owning our own home and building up some savings for retirement. Eventually we would like to leave something for our children and grandchildren after we are gone. However, if you require Long Term Care and have £23,250 or more in capital including your home you will be expected to pay the full cost of accommodation, board and personal care. These costs can literally wipe out your entire savings and your property may have to be sold to pay those fees. When anybody enters long term care they are initially “means tested” and ALL of their assets are taken into account. Only those who have very little (currently under £14,250) will escape the costs of care. How do we protect those assets? It may first of all be important to say what shouldn’t be done. A common mistake is to say “I’ll just sign my house over to my children. Transferring your house over to your children is sometimes seen as an easy way to avoid the problem. It is in fact an exceptionally bad idea! Many problems can arise which could leave you in an even worse position. For example: • If your child divorces, your house will form part of their divorce settlement. A forced sale could arise to pay out the ex-spouse’s share. • Your child may become bankrupt (perhaps as a result of a business failure or credit card debt) They could then force a sale of your house to pay off the creditors. • If your child dies before you, your house may pass to an unintended person (e.g. to your son-in-law or daughter-in-law). • Your child could borrow against the house putting the property at risk. • Your child could sell the house without your permission. • Your child could pressure you to enter care before you are ready to do so. You could also be accused of a ‘Deliberate Deprivation of Assets’. The City Council states: “If you dispose of any capital, assets or savings before you go into a care home or when you are already living in one, we are required to investigate the circumstances. If we decide that a significant factor in your decision for the disposal was to avoid or reduce the amount you have to pay towards your care home fees, this may result in the financial assessment being completed as if you still have this asset.” So, what can be done? Firstly we need to look at how your property is owned. The majority of people who buy a property with another person have the ownership arranged as Joint Tenants. This may be the correct way to own a property in certain circumstances but for many people this is not the answer for either Care Cost issues or Inheritance Protection. You need to Sever the tenancy on the property and change the ownership to Tenants In Common, so that each now owns an identifiable 50 (percentages can vary if required). You then set up mirror wills, each transferring the share of the property to a Trust. This can safeguard your home. A Protective Property Trust comes into force on first death. The share of the deceased’s property is passed into a Trust rather than straight to a beneficiary. The Trust is set up to accept the share of the property and at the same time a Lifetime Interest is created for the remaining owner of the other share of the property (normally the remaining spouse or partner). This lifetime interest ensures: 1. The remaining owner can sell the property if they want to, in conjunction with the trust. 2. The remaining owner can buy another property with the proceeds of the sale of the original property. 3. The remaining owner can borrow any cash in the Trust with or without interest as deemed by the Trustees (remember that the remaining spouse / partner would normally be beneficiary and Trustee). 4. The property cannot be sold without the permission of the lifetime tenant. 5. The lifetime tenant cannot be evicted from the house for the rest of their lives. 6. The ultimate beneficiaries of the Trust would normally be the children after second death.

Wooden Frame Window

Settlor Excluded Asset Protection Trusts (SEAPT)

The purpose of an SEAPT is to gift a property which is not the Principal Place of Residence ‘PPR’ to someone else, normally being a family member so that if falls outside of the estate seven years after the gift has been made to that person and would then not be taken into consideration for Inheritance Tax ‘IHT’ of the person who gifted the property. What are they? Lifetime discretionary trusts where the settlor is excluded from being a beneficiary (the settlor can still be a trustee). In other words, an asset protection trust or even an asset protection trust plus. What use are they? If the settlor is excluded from being a beneficiary of the trust, the value of the asset in trust will fall outside the settlor’s estate for IHT purposes after 7 years. If the asset being settled into trust is loaded with capital gains, the transfer may qualify for hold- over relief. Any historic gains are deferred (i.e. no capital gains tax is paid at the point the asset is transferred into trust). Settlor-excluded trusts example: BUY TO LET SEAPT = £250,000, NO Capital Gains Tax (Hold-over relief) £250,000 drops outside of the settlor’s estate for IHT purposes after 7 years. But … What about the rental income? First, ascertain if the settlor relies on that rental income. If they don’t rely on it … The income either accumulates in the trust, and pays income tax @ 45%; or the trustees mandate the income to a beneficiary who pays income tax at their own personal rate. If they do rely on it … The income must be paid to a beneficiary. The beneficiary may choose of their own free will to gift the income back to the settlor. If there is any hint that there is an arrangement in place, the trust will not be tax efficient.

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Flexible Life Interest Trusts (FLITs)

Flexible Life Interest Trusts (FLITs) are sometimes described as “the ideal modern family trust.” The reason for this is because it allows a person to benefit immediately on the death of the testator while at the same time protecting the assets for others i.e. the children. A FLIT arises when a beneficiary, normally a surviving spouse, is given a life interest in the assets contained in the estate. The trustees have the power to pay income and often capital to the life tenant. While the life tenant is alive, the trust is treated as an interest in possession trust. However, on the death of the life tenant, the trust automatically turns into a discretionary trust and is therefore treated as a relevant property trust. These types of trusts are therefore very flexible and ideal where the testator wants to provide for their surviving spouse during their lifetime whilst offering ongoing protection of trust assets for the other beneficiaries, up to a period of 125 years. How does a FLIT work? On the death of the testator, the residue of the estate is put into trust. The life tenant will be entitled to receive all income of the trust during their lifetime and will be treated as the main beneficiary. Trustees will still have discretion with regards to capital which can be given absolutely or loaned to the life tenant. It is important to add that the flexibility of giving or lending capital does not extend to just the life tenant but the other beneficiaries also. For example, the trustees could exercise their discretion to use some of the trust funds to pay off a child’s mortgage if they request this. As we have illustrated, given the flexibility with this type of trust, where the testator would like the trust funds to be distributed in a certain way or have concerns that they would like their trustees to be aware of, this should be set out in a letter of wishes. Advantages of a FLIT • Ideal for protecting the assets of the estate on first death but also on second death as the trust turns into a discretionary trust and can therefore has the ability to benefit future generations. • Protects the estate in the event the surviving spouse goes into care or bankrupt as the assets are owned by the trust and not the surviving spouse. The trust also protects the assets from passing to a new spouse by either being gifted to them, as part of divorce proceedings or being left to the new spouse by Will or intestacy. • The assets are protected for the benefit of the other beneficiaries from third party claims similar to that mentioned above as the trust turns into a discretionary trust and therefore the assets still belong to the trust and not the individual beneficiaries. • Where IHT is an issue for some beneficiaries, the trustees have the ability to loan the money to the beneficiary so it does not have any effect on the size of their own estate. • No anniversary or exit charges apply during the lifetime of the life tenant and therefore the life tenant can make gifts during their lifetime to reduce IHT payable. • The FLIT allows for the trustees to convert some or all of the trust fund into another type of trust. So if IHT laws change in the future, the trustees can change how the fund is held. The trustees could choose to end the trust early and distribute the assets to the beneficiaries if they wish to. Disadvantages of a FLIT The main disadvantage of a FLIT is the future IHT liability that this creates since assets in the FLIT would be treated as part of the life tenant’s estate for IHT purposes. What happens when the life tenant dies? On the death of the life tenant, the trust will end and no longer qualify as an Immediate Post Death Interest trust. Instead, it will automatically become a discretionary trust and be treated as a relevant property trust, therefore anniversary and exit charges may apply. How is a FLIT taxed? Inheritance Tax For inheritance tax (IHT) purposes, the life tenant of the trust is treated as inheriting the trust assets on the death of the testator. If the life tenant is the deceased’s surviving spouse or civil partner, the spousal exemption will apply and there will be no IHT due when the assets pass to the FLIT. This means the NRB will not be used and can be transferred to the surviving spouse so it can be used on second death. During the life of the life tenant, no anniversary and exit charges will apply. Whilst the life tenant is alive, the trustees and life tenant may make some gifts from the trust to other beneficiaries to mitigate IHT. It is important to add that these gifts will be considered as PETS and therefore the 7 year rule will apply for it to not form part of the life tenant’s estate for IHT purposes. On the death of the life tenant, the trust becomes a discretionary trust and is taxed with reference to the relevant property regime which means anniversary and exit charges may apply. Availability of RNRB Where a main residence is left to a FLIT, the RNRB will not be available as on second death, the assets pass to a discretionary trust and not to direct descendants absolutely.

Who Can Set Up a Trust?

Almost anyone over the age of 18 can be a settlor. A nominal amount of, say, £10 can be settled to trustees in the first instance. Further amounts can be added during your lifetime or on your death. Most commonly, trusts receive assets on your death, as directed by your will.

Who Can Be a Trustee?

Trustees are legally obliged to manage assets held in the trust. They must abide by the arrangements in the trust deed and adhere to trust law. Guidance for trustees often comes in the form of a Memorandum of Wishes sent to executors of your will. By following these instructions, they decide which beneficiaries should benefit and by how much. Decisions by trustees must be made unanimously. This is why it’s often helpful to appoint a professional trustee to provide support and guidance to the others.

Does a Trust Have a Bank Account?

Yes. This is normally done when assets are settled into the trust on death. The bank would need appropriate identification for all trustees and may charge admin fees for setting up the account.

Do Trustees Need to Meet?

Yes, and the law says they must meet regularly. However, if there is only a nominal amount in the trust initially, there would be no need for regular meetings. When the estate passes into the trust on death, trustees would need to meet regularly to manage the assets.

Do Trustees Need to Inform HMRC?

Yes, this needs to happen on death when assets are settled into the trust. Trustees must inform HMRC of the assets and whether any tax is due. After that, trustees must make an annual tax return to HMRC and pay the appropriate tax from trust funds

Are Trusts Listed Publicly?

No. That’s one of the advantages – your financial affairs are kept private because there is no publicly accessible register.

How Long Does a Trust Last?

In England and Wales, the trust’s lifetime – known as the perpetuity period- is 125 years. In Scotland, the period is 80 years. A trust is wound up by distributing all of its assets absolutely to the beneficiaries, as directed by the trust deed. One consequence of this is that the assets add to a beneficiary’s own estate. On their death, their estate could be subject to a bigger for inheritance tax bill. In addition, assets passing to beneficiaries are no longer protected against future divorces, bankruptcy and other creditors, and claims for long-term care. One way around this is to settle all this assets into a new trust before the end of the perpetuity period. The same trustees can be appointed to manage the new trust and the assets will still be protected.

What Does a Trustee Do?

A trustee is a person who takes responsibility for managing money or assets that have been set aside in a trust for the benefit of someone else. As a trustee, you must use the money or assets in the trust only for the beneficiary's benefit.

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