Our Trusts & Gifts solicitors and legal executives have experience of advising, setting up, managing and terminating Trusts. We will take the time to talk to you about all of your options to ensure that you are fully informed and confident in your Trust choices.
Our Wills, Trusts & Estates team of solicitors and legal executives can help to establish Trusts either through a client’s Will or during their lifetime, to help protect and control wealth for the benefit of their family. Trusts enable people to place assets under the control of others, so that they have full responsibility to manage those assets for the benefit of whoever is chosen, according to a set of instructions. There are many different types of Trusts and we can advise you on the different benefits of each type to assess which is appropriate for your circumstances.
Whatever your reasons, we can advise you on the best way to make your gift tax efficient. Trusts are treated separately for tax purposes and are assessed independently for Inheritance Tax, capital gains tax and income tax. We will consider your Will and other factors and advise on the options and pros and cons of absolute gifts or gifts into a Trust.
Whilst making a substantial gift to someone else may seem a simple gesture, it can actually be very complicated and throw up numerous tax considerations, especially if it involves property, such as inheritance tax, capital gains tax, income tax and SDLT. For example, a gift that saves Inheritance Tax may unnecessarily create a capital gains tax liability.
There are also other considerations, especially when parents gift property to children. For example, if a child later divorces, the property would be considered part of the matrimonial ‘pot’. Similarly, if their child gets into financial difficulties then the gifted asset would be vulnerable. There are also care costs considerations and deliberate deprivation consequences should be considered.
We would advise that before you make any substantial gifts you seek professional advice on the best way to make your gift tax efficient. There are many legitimate ways to reduce your Estate for Inheritance Tax purposes and a member of our team would be happy to discuss these with you. We will consider your Will and other factors and advise on the options and pros and cons of absolute gifts, or gifts into a Trust.
A Trust is a legal structure with its own tax identity that manages assets (property, land, cash or shares) and can be put in place during a person’s lifetime or on their death through their Will.
There are a number of reasons why someone may set up a Trust. For example, you may have a child or family member who may not be able to manage their own finances, and a Trust structure could allow you to leave a sum of money in the hands of the Trustees you have appointed to manage for the benefit of that family member. Furthermore, in blended families a Trust may be used to benefit a surviving spouse whilst preserving assets for the children of a previous relationship.
Trusts can also be a useful Estate tax planning tool. For example, if a grandparent wishes to support their grandchildren financially, they could put funds into a Trust which could be used to contribute towards their school fees. From an Estate planning perspective, it is possible that if the Grandparents survive for a period of seven years from the date of the gift into the Trust, that the value of the gift is not included as part of their Estate when calculating their Inheritance Tax Liability.
All Trusts must have certain components;
There are a number of different types of Trusts, some of the most popular being;
When setting up a Trust the following should be taken into account:
Trusts are a complex subject and the timing, beneficiaries and wording can be very important when setting one up. Our Wills, Trusts & Estates team can help with the setup of Trusts, advise how to deal with HMRC and advise as to the costs of setting up a Trust and running it in the long-term. Administering a Trust successfully can be time consuming and daunting and our solicitors can help you with your duties as a Trustee or help you look after your Trust correctly. We can advise on the full range of lifetime gift options, making full use of relevant exemptions or other reliefs.
Trusts often come to a natural end but sometimes a decision may be made to wind up a Trust early by the Trustees. It is essential that the Trustees consult the Trust Deed and our experienced team can help advise on how to carefully adhere to these procedures. The winding up of a Trust can create significant tax liabilities and it is essential that professional advice is obtained to ensure that everyone is aware of their liabilities, and where they can be mitigated if possible.
There may come a time when you decide to make some lifetime gifts to your children, family or friends. Lifetime gifts are made for a variety of reasons: sometimes to help with a deposit for a house, or for the pleasure of giving a gift in lifetime and then living to see the recipient enjoy it, or perhaps for Inheritance Tax planning purposes.
Gifts between spouses during their lifetime or on death are exempt from Inheritance Tax and many gifts made more than seven years before death will escape tax. Therefore, if you plan in advance, gifts can be made tax-free and result in a substantial tax saving. However, careful consideration needs to be given to gifts, for example, a gift that saves Inheritance Tax may unnecessarily create a capital gains tax liability.
Gifts made during a person’s lifetime to another person are called Potentially Exempt Transfers (PETs). Broadly speaking, if you have made a gift which is a PET, you need to survive for seven years from the date of the gift for it to be ignored for inheritance tax purposes when you die, i.e. fall out of your Estate. If you die within seven years of making the gift, it is known as a ‘failed PET’ and even though you gave the asset away before your death, Inheritance Tax might still be payable on it.
If the person making the gift died between 3 and 7 years of making a PET, taper relief can be applied when adding it to the estate value. This relief only applies if the amount of the PET exceeds the Inheritance Tax threshold, which is currently £325,000 and is taxable. If the relief applies then it reduces the amount of Inheritance Tax payable on the PET, depending on the number of years the person survived after making the gift.
As part of an overall strategy to strengthen its tax collection defences, the government has implemented a general anti-abuse rule (GAAR). This is particularly important for gifts where you still retain some right or benefit over it. Even if you live for more than seven years after making a gift, if you continue to use or benefit from it, it is likely to be included in the Inheritance Tax calculation on your death, known as a ‘gift with reservation of benefit’ (GROB).
Examples of GROBs could be:
There is a “de minimis” defence – that the continuing enjoyment by the donor is so small that the “virtually to the entire exclusion” rule is satisfied – but HMRC is known to take a tough line on how much continued enjoyment is allowed.
Individuals who give away or gift certain assets (usually land or property) but continue to enjoy use of them are often unaware that an annual lifetime tax or POAT may arise on the gift. An example might be where they gift their home but continue to live in an annex. POAT is an additional charge to income tax which looks to tax the yearly benefit an individual is deemed to receive from the continued use of a gift. This additional income tax charge must be declared yearly to HMRC on an individual’s tax return.
The purpose of POAT is to catch those transfers which have managed to escape the GROB rules and are otherwise exempt from IHT.
If you need to go into care and want support from your Local Authority to pay the fees, which can easily run thousands of pounds a month, they will do a financial assessment of your income, savings and property to calculate how much you should contribute towards the fees.
If you intentionally reduce your assets so that these are not included in the financial assessment e.g. give away a lump sum of money, buy substantial gifts out of character with previous spending, or transfer the title deeds of property to someone else, this is known as deliberate ‘deprivation of assets’.
If your Local Authority decides that you have deliberately reduced your assets to avoid paying care home fees, they may still calculate your fees as if you still owned the assets, even though they are no longer yours. If you transferred an asset to another person, the third party may be liable to pay the Local Authority the difference between what you would have been charged and what you were charged at the time of the assessment.
The timing of gifting is important. If you were fit and healthy when you gave assets or money away, and you could not have reasonably expected that you would need imminent care, then your actions may not count as deprivation of assets.
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