The death of trusts, long live trusts
Trusts have been wonderful instruments for protecting wealth for future generations for literally centuries. In fact the history of trusts can be traced back the the Middle Ages when knights would go off to battle and leave their property and other assets to be managed by trusted people known as trustees. Such trustees would look after their assets until they returned from war or would distribute their assets to their loved ones, their beneficiaries, if they were unfortunately killed in battle.
Ever since those days Trusts have been fantastic devices for bloodline protection in particular as well as for tax efficiency especially Inheritance Tax mitigation.
The problem is that in recent years in particular the government has changed the legislation in a number of ways that makes trusts far less advantageous for bloodline protection because of successive tax hikes. I consider this a real pity because without the current tax disadvantages trusts are a great way of controlling wealth for beneficiaries and protecting assets for future generations.
The legislative changes which have had a marked effect on trust planning are as follows;
The Residence Nil Rate Band (RNRB)
Inheritance Tax ISA
Revocation of the Raisaff rule
The RNRB is an additional Inheritance Tax free allowance worth an additional £100K per individual rising to £175K each over the next 3 tax years. If you do not leave your property in your Will to your children and leave it to a trust instead (Interest in Possession Trusts are an exception) then you will be denied an IHT free allowance which is worth up to £200K per married couple today rising to £350K in the next 3 years! This could mean paying extra IHT of as much as £140K in the future!
As a result of pension freedoms which were introduced in April 2015 personal pensions are now free of Inheritance Tax. However, if you write your pension into trust and you die after age 75 your pension will be hit by a swingeing 45% tax charge and will move from a tax free pot into a fully taxed trust! Why on earth would you want to do this?
When you die your tax free ISAs become taxable investments. They are even subject to IHT on your death unless they are AIM ISAs. If you are married and you leave your ISAs in your Will to your spouse, he or she may claim a one-off additional ISA allowance within 3 years of your death to convert your taxable ISAs back into tax free ones! So why would you want to put such tax free investments into a taxable trust?
There was a rule known as the Raisaff Rule which was based on a famous tax case in which it was established that multiple trusts could each have a tax free IHT allowance or Nil Rate Band (NRB), worth £325K. This rule has now been revoked by legislation meaning that multiple trusts now have to share the one NRB!
As a result of these legislative changes trusts are no longer as useful as they once were. I consider this a real pity because the government clearly considers trusts to be principally a method of mitigating taxation whereas the reality is that they are primarily a device for controlling and protecting wealth for current and future generations and have served that purpose really well since the Middle Ages.
The irony is that at the same time as trusts are being heavily taxed the government actively encourages and supports many Inheritance Tax saving plans which sadly do not offer bloodline protection. Unfortunately it is the usual case of the government having no joined up thinking which inevitably leads to the law of unintended consequences.
Whilst trusts are less attractive than they once were they can still be useful today in certain particular circumstances. For example, where bloodline protection is an overriding factor then trusts should be seriously considered inspite of the tax disadvantages. However, the bloodline protection benefits do need to be carefully weighed up against the inevitably higher tax charges on trusts.
One particularly useful advantage of trusts is where they are used for pension death benefits or life insurance. This is because where such protection is written into trust the benefits are paid to beneficiaries very soon after death and bypass probate. This is an absolute godsend for beneficiaries who not only have cash in their hands quickly after the death of a loved one but also provide funds to pay IHT on the deceased’s estate which then allows probate to be granted.
So Trusts do still work but you need to take professional advice on when and how to use them. So do not hesitate to contact us if your are unsure what you should do. You know it makes sense.
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