In this article, Jason Pearce, Head of Technical Sales, Hong Kong & NE Asia, considers the benefits of placing assets in a trust and taking advantage of the current nil rate band to reduce UK inheritance tax bills.
In common law countries like Hong Kong and the UK, trusts have been recognised and used for centuries as a way of protecting the family fortune from “wastrel” offspring (think of the movie Arthur, starring Dudley Moore), or from those who seek to prey on them (think Mr Wickham in Pride and Prejudice).
The assets of a discretionary trust are legally owned by the trustees, who, as the name suggests, have absolute discretion over how, when and to whom (the beneficiary) they distribute the benefits. The person who sets up the trust (the settlor) gives the trustees a letter of their wishes, to guide the trustees in their decision making. The letter can be amended or updated at any time during the settlor’s lifetime. No beneficiary ever has absolute right of benefit, merely a hope. Assets inside the trust therefore enjoy a very high degree of protection from those whose motives may be less than pure.
Reduce UK inheritance tax bill
For UK-domiciled persons, wherever they are in the world, trusts can provide the added benefit of reducing UK inheritance tax (IHT) bill. This is because UK domiciles are subject to IHT on everything they own worldwide when they die – if you gift something into a trust, you no longer own it, the trustees do.
Leaving assets to a trust is also completely confidential, whereas assets left via a Will are in the public domain in many countries. Once someone has died and their UK Will has gone through probate, you can download a pdf copy of their Will from the UK government website for a fee of £1.50*.
But there are pitfalls to be aware of:
1. If you are one of the potential beneficiaries of your trust, this is called a gift with reservation of benefit – you haven’t really given anything away and the trust assets will still be subject to IHT.
2. The gift doesn’t leave your estate immediately – there is a 7 year clock on it (this is to prevent deathbed planning).
3. If a UK domicile gifts more than their available nil rate band (NRB) into a discretionary trust, or series of trusts, in any 7 year period, the excess is charged immediately to IHT at half of the death rate (ie 20% at current rates).
4. Discretionary trusts can, in some circumstances, be subject to periodic charges (every 10 years) and exit charges when assets are distributed from the trust (with suitable planning these charges can be reduced, even to zero).
Nevertheless, this does present a valuable opportunity.
The NRB is currently £325,000; if you haven’t already used it, you can gift this amount into a discretionary trust, bearing in mind the points made above. If you survive 7 years, the gift will have left your estate, you will have a renewed NRB and can repeat the process. Someone in their fifties and in normal health could go through this cycle perhaps four times; if the NRB stays at the current rate of £325,000, this would allow them to shelter £1.3 million from IHT, saving up to £520,000.
If you would like to find out more, take the time to read our new sales aid which considers making gifts into trust up to the available NRB and provides example case studies. You can also contact your usual Quilter International sales representative to discuss trusts and Quilter International offshore bonds, which can be held as an asset of a trust.
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The information provided in this article is not intended to offer advice.
It is based on Quilter International’s interpretation of the relevant law and is correct at the date this blog was published. While we believe this interpretation to be correct, we cannot guarantee it. We cannot accept any responsibility for any action taken or refrained from being taken as a result of the information contained in this blog.