When planning for the future, many individuals look for effective ways to protect their wealth and pass it on to their loved ones. One such method is setting up a discretionary trust, which can provide flexibility and control over how assets are distributed. However, Discretionary trusts and inheritance tax also have significant inheritance tax implications in the UK.
- A discretionary trust is a type of legal arrangement where assets are held by trustees on behalf of beneficiaries.
- Unlike other types of trusts, the trustees have full discretion over how and when to distribute the assets to the beneficiaries.
- This means the beneficiaries do not have an automatic right to the trust's income or capital.
- Instead, the trustees decide how best to distribute the funds based on the settlor’s wishes, usually outlined in a letter of wishes.
Discretionary trusts are commonly used for varied purposes like:
- Protecting assets for future generations
- Providing for beneficiaries who may not be financially responsible
- Reducing inheritance tax liabilities
- Supporting family members with specific needs, such as disabled beneficiaries
Inheritance Tax and Discretionary Trusts
Discretionary trusts are subject to a complex inheritance tax structure. Unlike outright gifts, which may be exempt after seven years, discretionary trusts are subject to the relevant property regime, which includes:
- Entry Charge – If an individual places assets worth more than the nil-rate band (£325,000 as of 2024) into a discretionary trust, an immediate 20% inheritance tax charge may apply.
- Periodic (Ten-Year) Charge – Every ten years, the value of the trust is assessed, and a maximum 6% inheritance tax charge applies to any value exceeding the nil-rate band.
- Exit Charge – When assets are distributed from the trust, an IHT charge of up to 6% may apply, depending on how long the assets have been in the trust.
Benefits of Discretionary Trusts for Estate Planning
Despite the tax implications, discretionary trusts offer several advantages:
- Control over assets – The settlor can ensure assets are distributed according to their wishes.
- Protection from creditors – Trust assets is usually protected from creditors and legal disputes.
- Tax efficiency – If structured correctly, discretionary trusts can help reduce inheritance tax liabilities, particularly when used alongside other tax planning strategies.
- Flexibility – Trustees can adapt to changing family circumstances over time.
- Discretionary Trusts and Inheritance Tax Solutions – Get Precise Solutions from IWC Probate Services
Understanding the tax implications of discretionary trusts can be challenging, and incorrect structuring can lead to unexpected tax liabilities. IWC Probate Services offers expert guidance on setting up discretionary trusts, ensuring they are structured efficiently to minimise inheritance tax. Their experienced team provides tailored solutions that align with your estate planning goals, giving you peace of mind that your wealth is protected for future generations.
Summary: Discretionary trusts remain a popular tool for estate planning in the UK, offering flexibility and protection for beneficiaries. However, their tax treatment is complex, and careful planning is essential to avoid unnecessary inheritance tax charges.