Have you ever wondered how Britain’s wealthiest families manage to avoid inheritance tax? When the Gerald Grosvenor, the 6th Duke of Westminster died in 2016, his 25-year-old son, Hugh, inherited a £9 billion fortune without triggering any death duties. Like many old-money families, the ability of the Grosvenor’s to avoid paying any part of the family fortune into the government’s coffers is all to do with cleverly tying up their assets in trust, thereby ensuring they are preserved for future generations.
According to the Grosvenor Estate’s own description of its structure , the six trustees (of whom the late Duke was chairman) “hold the assets of the group for the benefit of current and future members of the Grosvenor family”.
Income and other benefits can be paid out to beneficiaries, who may or may not include the trustees, and who will be taxed on them as normal.
One of the main reasons people seek to put their property in trust is to avoid having to sell their property to pay care home fees. It is human nature to want to hang on to what you have spent your life working for and to pass it down to your children and grandchildren. For most people, especially those who have paid a lifetime’s worth of taxes, it is abhorrent to think your assets will be stripped to pay for later life care. And bare in mind, such care does not come cheap – the latest figures show a place in a residential care home in Eastborne costs, on average, more than £60,000 a year.
However, local authorities are having to provide more care for an ageing population with fewer resources. Therefore, if you set up a trust expressly to avoid care home fees, you can be fairly certain authorities will claw back the funds to pay for your residential care requirements.
If you have substantial assets and wish to protect your wealth, you may be asking the question – is it worth setting up a family trust? The answer is yes, but you must do it early enough, cleverly enough, and make sure you get the right advice. By doing so, you may protect the beneficiaries of your estate from having to pay inheritance tax.
What is a trust?
There is no definition of what a trust is per se, but one that has been accepted by the courts is as follows:
‘A trust is an equitable obligation, binding a person (who is called a trustee) to deal with property over which he has control (which is called the trust property), for the benefit of persons (who are called the beneficiaries or, in old cases, cestuis que trust), of whom he may himself be one, and any one of whom may enforce the obligation.’
For a trust to be created, three certainties must be present:
- Certainty of the intention to create a trust.
- Certainty as to what property will be transferred into the trust.
- Certainty as to who the beneficiaries of the trust will be.
What are the common types of family trusts?
The most common types of family trusts set up are ‘bare trusts’, ‘interest in-possession trusts’, ‘discretionary trusts’ and ‘mixed trusts’.
A bare trust (also known as a simple trust) is where the beneficiary automatically gains an absolute right to the assets held and income generated by the trust. Once a bare trust has been established, the beneficiaries to it cannot be changed.
An ‘interest in-possession’ trust entitles the beneficiaries to the income generated by the assets held in trust (known as the Life-Tenant). The capital normally passes to other named beneficiaries on the death of the Life-Tenant. An example of an interest in possession trust is where a spouse of a deceased settlor continues to receive the income generated by assets held in trust and upon their death, those assets are passed onto the children.
A discretionary trust provides flexibility regarding how a trust’s capital and/or income is used. For example, you may wish to pass on capital in the form of a family business, but one may be more commercially minded than the other, therefore you may wish to give them a more substantial stake.
A mixed trust is a mix of all of the above types of trusts.
Trusts and tax
One clear reason for investing the time and capital to set up a family trust is to minimise inheritance tax. Currently, a married couple have an inheritance tax allowance of £325,000 each. If one spouse passes their estate onto the surviving spouse upon death, their allowance can be claimed by the surviving spouse, providing them with £650,000 tax free to pass on to their decedents. In addition, there is now a Resident Property Nil Rate Band which applies if you pass your main residence onto your direct decedents after your death. From 2018-2019, the Resident Property Nil Rate Band will be £125,000. This is set to increase every year, reaching £175,000 in the 2020 to 2021 tax year. As with the inheritance tax allowance, a person can pass their residential property allowance to their surviving spouse. Therefore, after 2020, a couple will be able to leave £1 million to their children tax-free.
This may sound generous, but with house prices rising year on year, more people will have estates valued at over £1 million. This is especially true if you have invested in other property as buy-to-lets, which will not be eligible for the Residential Property Nil Rate Band allowance.
If you have other investments, you can protect them from being subject to inheritance tax by creating a family trust. For example, assets transferred into a bare trust may be exempt from inheritance tax, so long as the transferor survives for seven years after making the transfer or making these regularly out of excess income. Therefore, it is imperative to set up a trust whilst you are relatively young and healthy.
In another example of how assets in a trust are taxed, if assets have been passed into an ‘interest in possession’ trust prior to 22nd March 2006, there is no inheritance tax to pay. Assets transferred after this date may be subject to a 10-year inheritance tax payment (due 10 years after the trust was set up and every ten years after that).
Which type of trust is best for me?
Because of the ability of authorities to claw-back assets placed into trust, it is imperative that you seek legal advice as to which type of trust will best protect your wealth and help you plan for your later life. It may be that a trust is not suitable for your circumstances and you are better off gifting your assets to your children.
If a trust is suitable, an experienced solicitor will assist you in working out the best type to choose to protect your capital and the income generated from it.
To find out more, please call one of our expert later-life team.
Hart Reade Solicitors is a full-service law firm with offices in Eastbourne, Hailsham, Polegate and Meads. We hold a Lexcel accreditation from the Law Society of England and Wales and are members of The Association of Lifetime Lawyers. To make an appointment with one of our private client solicitors regarding setting up a family trust, please phone our office on 01323 727 321.
Please note, this article does not constitute legal advice.
 There will be a tapered withdrawal of the additional nil-rate band for estates with a net value of more than £2 million. This will be at a withdrawal rate of £1 for every £2 over this threshold.