Reducing inheritance tax main reason individuals set up trusts
9 Nov 2018
HMRC research has found that the main reason individuals set up trusts is to reduce their inheritance tax (IHT) liability through the use of the nil rate band although tax advisers disagree stating that trusts are not set up primarily for tax reasons
9 Nov 2018
A key reason why settlors set up a trust was to make use of the nil rate band which allows them to place assets up to the threshold into the trust with no inheritance tax charge.
Settlors believe that by setting up a trust they are able to avoid IHT on their death, this is due to settlors being able to put an asset under the nil rate band (currently £325,000) into a trust and there being no tax change if they survived for seven years. The research points out ‘they interpreted this as them being able to avoid IHT, even though they could have gifted the same amount or even more and not had to pay any IHT.
‘However, settlors did not consider gifting as a viable option because this would not allow them to still be in control of the assets. They wanted to be able to pass on their assets but continue to be in control of how they were managed and used for a set period of time.’
Being able to hold over capital gains tax (CGT) was viewed as another positive to setting up a trust but tax advisers argued that the tax is not being avoided but ‘being pushed down the generations, so the assets can be kept within the family’.
Reduced income tax liability was seen as an additional benefit to having a trust rather than a driver for setting up a trust because settlors were commonly focused on achieving another objective, such as a personal goal, of passing assets to a family member and/or reducing IHT. For example, they may be passing on income through the trust to basic rate tax payers.
Tax advisers were of the view that settlors did not set up trusts primarily for tax purposes but personal reasons, such as flexibility and control, were the main drivers. They reported that settlors did not set up trusts for tax reasons and that if tax was a consideration, it was always a secondary factor.
The research revealed that tax advisers tended to discuss trusts as an alternative to gifting assets, and from this view, there were no real tax benefits to putting assets into trust but settlors did so to meet a personal objective.
However, settlors believed that a trust allowed them to access an additional, or a number of additional IHT allowances, which could either take their assets out of IHT completely or minimise their liability.
Settlor’s reasons for setting up a trust fell into four categories:
- Protection from people: trusts are used to protect assets from other people, including beneficiaries and other relatives.
- Protection from taxes and other costs: trusts can be used to minimise tax liabilities, IHT in particular or to protect a settlor’s home from care home fees.
- Control: settlors set up a trust because they want to pass on their assets but they do not want to do so immediately. A trust allows a settlor to secure their assets for a beneficiary but retain control.
- Flexibility: trusts can be more flexible than a will. A trust allows a settlor to respond to changing circumstances and needs within their family.
The research was undertaken by Ipsos MORI Social Research Institute on behalf of HMRC ad contains findings from qualitative research conducted with settlors of trusts and with agents who have helped to set trusts up.
Exploring the Use of Trusts is here.
Report by Amy Austin