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Even though trusts can be used to reduce or avoid inheritance tax, there are lots of details to consider, as well as the cost involved.

Article by Akwasi Duodu

Introduction: Using trusts to reduce or avoid inheritance tax

When we talk about inheritance tax (IHT), trusts can be really helpful in reducing taxes and keeping wealth safe. This article will explore what trusts are, how they can help with inheritance tax, and why experts called financial advisers are important in managing these special money arrangements.

Let’s dive in and understand!

What is a trust?

A trust is like a special box that a person in charge (called a trustee) takes care of for others (beneficiaries). There are different types of trusts for different needs and situations. Here are three types:

  • Discretionary Trusts
  • Interest in Possession Trusts
  • Bare Trusts

In the following sections of this guide to using trusts to reduce or avoid inheritance tax, we look at who can help you with the process, some potential drawbacks, and other key information.

How can trusts help lower inheritance tax?

Using trusts is like playing a smart game with taxes and it certainly can be one of the ways to avoid inheritance tax.

When you put things into a trust, they usually don’t count as part of your estate when it’s time to pay taxes. This can make your estate worth less in the eyes of HMRC – and that means less inheritance tax!

One thing to consider is that if you put some assets into a discretionary trust and wait for seven years, they usually don’t get taxed at all. This can help a lot in passing your wealth down to family and / or friends.

Please note, this is a simple explanation. There are lots of rules and laws surrounding inheritance tax, so always seek the advice of an experienced financial adviser.

Related articles on inheritance tax & estate planning

Enjoying this article so far? Here are some more articles covering the topic of IHT, protecting your wealth, and estate planning:

In the next sections of this short guide on using trusts to avoid IHT, we look at any potential obstacles you may face, and the importance of seeking professional inheritance tax advice.

Are there any drawbacks to using trusts to avoid IHT?

Even though trusts can be used to reduce or avoid inheritance tax, there are lots of details to consider, as well as the cost involved.

Trusts also have some charges and fees based on the value of the assets you put in them. Knowing about these taxes and fees is really important if you want to use trusts the right way.

Who can help?

Getting help from people who know a lot about inheritance tax is really important when you want to make or use a trust. These experts are called inheritance tax advisers or estate planners. They are typically a financial adviser who specialises in estate planning and inheritance tax.

An experienced financial adviser will really understand the rules and laws about trusts and taxes. They make sure the trust is set up to help you achieve your goals – such as reducing IHT.

They also help with things like picking the right person to take care of the trust and keeping things running smoothly.

Related reading: Six things we can learn from the wealthy.

Is it a good idea to put your house in a trust to avoid inheritance tax?

Making a trust for your house can be a good plan to reduce inheritance tax. However, you need to think carefully and ask experts for advice. Before we move on, it’s pertinent to note that another way to avoid IHT is to gift your house to your children, however, there are many things to consider if you are looking at this option.

When your house is in a trust, it may not form part of your taxable estate. Nevertheless, there are important things to think about such as what type of trust to use and any taxes you might need to pay.

Trusts can be really helpful, but they can also be a bit tricky. Talking to an inheritance tax planner can help you decide if putting your house in a trust is right for you.

Summary: Using trusts to reduce or avoid inheritance tax

Trusts are like secret tools for playing the tax game smartly. They can help reduce the amount of inheritance tax and keep your wealth safe for the future. But making and using trusts is like doing a puzzle – it’s not always easy.

That’s why talking to experts who know about inheritance tax is so important. These experts can guide you and make things simpler. With their help, you can use trusts to make sure your loved ones get what you want them to have.

As a result, you will have peace of mind, knowing your family’s wealth is protected.

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