As advisors, we are bound to say Trusts
are a fantastic thing. Asset protection is a great way of sharing income around
the family, and a potentially Inheritance Tax (IHT) efficient store of
value. Many clients have found a place for
them in their business, but there can also be a reluctance to take the
plunge. This article talks about why, in
the right circumstances, you should.
During lifetime, a trust offers a great
opportunity for income and capital sharing.
This is particularly appealing because
the income generating assets themselves are controlled by the Trustees, and
therefore out of the reach of beneficiaries or potential creditors.
Many unlisted trading companies will
qualify for 100% business relief and therefore may not be of major concern for
IHT purposes, as this relief reduces their IHT value to nil.
However, companies with surplus cash,
investments, or which are potentially going to be sold or liquidated, can be
dragged into the IHT net at 40%.
Transferring shares into trust not only
banks the business relief at the time of transfer, but also freezes the value
of the shares at that time, which will be relevant if values are expected to
Once the shares are in trust they are more easily kept out of the reach of any perceived hotheaded beneficiaries, creditors, or a marital breakup. The Trustees, with discretion, can exercise complete control over who gets what. This could be a good incentive to keep family members on track.
The main perceived downside of trusts are complexity, cost, and potential for conflict if beneficiaries feel they are not being treated fairly.
In practice, and in the right circumstances, the tax savings can significantly outweigh the costs. Complexity can be kept to a minimum by setting up a structure that can be managed within the family without significant external involvement (eg. by mandating income to beneficiaries, and keeping Trustees within the family).
The fairness issue is ultimately a question for the Trustees, but with openness and the backing of a Family Charter or council, there is no reason why a trust should be any more disadvantageous than a direct shareholding.
Setting up a trust does need professional advice, and there are potential tax charges to consider, many of which are negated in the family and owner managed business environment with the correct claims. Where they don’t work, families might consider a Family Investment Company (FIC) or partnership as an alternative. You can read more about Trusts on our Family Investment Companies insight. The government have indicated they have no plans to change capital gains or IHT in the current parliament, and so now could be a good time to consider your options and take advantage of existing rates.
Please get in touch with Nick Latimer or your usual Crowe contact to discuss trust planning further.