Ilyas Patel Accountants in Preston
Ilyas Patel Accountants in Preston
Rising taxes and tightening relief rules have spurred many families to explore trusts as a solution for inheritance tax (IHT) planning.
As the government introduces stricter measures, trust arrangements are gaining popularity among those seeking to protect their assets for future generations.
While trusts can be advantageous, they come with complexities and costs that demand careful consideration and professional advice.
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Recent changes in inheritance tax laws have sparked a surge in trust enquiries.
Key adjustments include limiting agricultural and business property relief and incorporating most pension pots into estates for IHT from April 2027.
These measures heighten the urgency for robust estate planning, especially for farmers and business owners who previously relied on these reliefs to minimise tax burdens.
Trusts are proving particularly appealing due to their ability to secure assets for beneficiaries while allowing some control for the settlor.
For example, discretionary trusts enable trustees to allocate assets based on family needs, offering flexibility when circumstances change, such as a divorce or bankruptcy within the family.
The two primary trust structures used in estate planning are bare trusts and discretionary trusts, each serving distinct purposes.
These straightforward arrangements hold assets for a named beneficiary, typically a child or grandchild, who gains full control upon reaching adulthood.
While these trusts are simple to manage, they lack flexibility; once assets are transferred, the decision is irreversible.
These provide greater control, allowing trustees to decide who benefits from the trust and when.
This adaptability is valuable for managing family businesses and protecting assets against potential financial risks faced by beneficiaries.
However, they involve complex tax rules, including periodic charges of 6% on the trust’s value exceeding the tax-free allowance (£325,000).
Creating and maintaining a trust involves significant expenses, which can range from a few thousand pounds upwards, depending on the complexity of the arrangement.
Annual tax reporting, valuations, and administrative costs add to the financial burden.
Missteps in trust management, such as exceeding IHT thresholds or failing to meet reporting requirements, can result in unexpected tax bills.
Despite these challenges, the benefits of trusts often outweigh the drawbacks, particularly for individuals with estates valued above the current IHT thresholds.
Properly structured, trusts can prevent assets from being taxed multiple times as they pass through generations.
Farmers and business owners face a narrowing window of opportunity to transfer assets into trusts under favourable terms.
By April 2026, reliefs on agricultural and business property will be capped at £1 million per benefactor.
After this, assets exceeding the threshold will attract a 20% IHT charge, significantly reducing the tax efficiency of passing on such assets.
Those considering trusts must also navigate the seven-year rule, which states that assets placed in a trust are exempt from IHT only if the donor survives for at least seven years after the transfer.
The government has hinted at possible changes to this rule, creating further urgency for immediate action.
Trusts can be a powerful tool for reducing inheritance tax, safeguarding assets, and maintaining control over their distribution.
However, they require meticulous planning and professional expertise to navigate the associated costs, regulations, and potential pitfalls.
At Ilyas Patel Accountants, our team of specialists can guide you through the complexities of trust arrangements and ensure your estate plan is both tax-efficient and aligned with your family’s goals.
Fill out our form here for any questions, give us a call at 01772 920579, or message us on our WhatsApp for out of office hours.
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Ilyas Patel