Preserving your wealth with a family trust

Nella Correia

Origen Financial Adviser

reserving your wealth with a family trust

In April, we shared some financial planning tips on making gifts to tackle Inheritance Tax (IHT) liabilities, but many clients have higher value illiquid assets which cannot be easily split to take advantage of the gifting allowances.

Preserving your wealth for the next generation and mitigating Inheritance Tax on your estate is an important part of financial planning. Your estate will have a Nil Rate Band (NRB) allowance for IHT which is £325,000 per individual as well as an additional Residence Nil Rate Band (RNRB) allowance of £150,000 per individual in the current tax year 2019/20 (increasing to £175,000 in the tax year 2020/2021), provided that you leave your home to your direct descendants. For a married couple or civil partners this means a combined tax free allowance of £950,000. There is a tapered withdrawal of the RNRB for estates with a net value of more than £2m. When your estate exceeds these allowances, the IHT rate is usually 40%.

Consider a family trust

The most common investments which cannot be easily split up, known as illiquid assets, are properties such as holiday homes or rental property. If you wish to transfer/gift these assets out of your estate, get the ‘seven year’ clock ticking and potentially mitigate IHT, but retain some control, then creating a family trust can help to protect these assets from IHT.

Case Study:

Stanley & Clare own three investment properties and they want to pass these to their children, Alex and Jessica. Stanley and Clare no longer need the income from these properties but they want to protect these assets from IHT and keep them in their family bloodline.

By creating a family trust, with Stanley and Clare as trustees and a UK professional trustee, the trust can allocate income and any capital from the trust to their chosen beneficiaries. Stanley and Clare can choose who the beneficiaries of the trust are, so they can control whether their assets remain in the bloodline or are spread more widely.  

Managing the Inheritance Tax liability

Clients who own more than one investment property may need some rental income to support their living standards. Under current tax rules, after seven years, the value of the property which has been moved into the Family Trust will be removed from their estate for Inheritance Tax purposes.  As they will have recovered their nil rate band for Inheritance Tax, they can add another property to the Family Trust after seven years.

Trustees can take some income and can take a small management charge for managing the properties and running the trusts. The income generated by the property within the trust could be used for children or grandchildren to make use of their individual tax allowances, for example annual ISA allowances or pension contribution limits.

How can Origen help

There are many ways to preserve your wealth for the next generation and our advisers can recommend what approach will best suit your income needs and your objectives, taking account of the wider objectives for your beneficiaries.

This area can be very complex and we often recommend meeting with you and your children, so that all parties understand the advice recommendations and how it will impact their financial planning. Careful consideration is needed as to when a family trust will be suitable – as once an asset has been put into trust, it can be very difficult to remove it from a trust and back to direct ownership.

Information contained within these communications was correct at the time of publishing. These news articles are for general information only and are not intended to be viewed as a personal recommendation. The value of investments and the income from it could go down as well as up. You may not get back what you invest. It is recommended that you seek competent professional advice, before taking any action.

CA4504 Exp: 01/2020

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