INHERITANCE TAX AND TRUSTS

Inheritance Tax is a tax on capital as is Capital Gains Tax. However, Capital Gains Tax is applied to a gain on capital that is an investment which we intend to make a gain on, whereas Inheritance Tax is a tax on anything we own over a certain threshold (which for 2009/10 is £325,000). This includes assets that we do not intend to necessarily seek a gain on e.g. our homes.

Even with the current house price situation, just to keep pace with house price inflation over the last 7 years the current £325,000 ‘nil rate sum’ needs to be over £400,000. So the Chancellor is doing very nicely thank you. Many people believe that there is little or nothing that can be done about Inheritance Tax, but this is not so.

Reduction of Inheritance Tax can be achieved through the use of trust legislation. Many people are put off by the use of the word trust as they have heard, or read about people that have problems with trusts. Trusts can be as simple as you wish them to be and quite frankly should be kept as simple as possible. It is when they are made over complicated or when the wrong type of trust is used that there can be a problem.

There are several different types of trust and which is right for you will depend on your circumstances and objectives. More often than not it is Inheritance Tax that is the motive and most of these types of trust are very straight forward.

One of the most interesting aspects of trusts is one that is often overlooked by many – how else can you be sure that all your assets end up where you want them to? Many of you will express your wishes through a Will but anything in your Will is taxable (over the nil rate sum) and therefore, assets may need to be sold to pay Inheritance Tax liabilities, so your estate doesn’t end up as you wished!

Another point which many people go to great lengths to make, is that they have to live 7 years before their money is outside of the estate and they are too old to start such planning; but look at it objectively:

1. it is unlikely we know how long we really have to live and every pound a trust makes is outside of your estate immediately even if you don’t live 7 years

2. the money can be accessed should it be required by the Trustees – it does not have to wait for probate. I have lost count of the people who have said ‘I don’t have 7 years’ but are still alive 7 years later.

Under the laws of Perpetuity a trust can have a life of 80 years which means that you can keep money out of the Inheritance Tax system for generations i.e. no 40% tax each time someone dies.