To find the right kind of trust you need to first examine your personal requirements. We shall examine some of the factors that come into play when deciding which trust will suit you specific needs.
Are you domiciled to the UK?
If the answer is yes then we’ll get to you in minute. If the answer is no then there are a few options available. A discretionary trust created with assets gained outside of the UK can be transferred to the UK free from Inheritance Tax, the discretionary trust also gives you options for further Inheritance Tax planning if you wish to become a resident of the UK. If the discretionary trust only has assets from outside the UK then the trust will become what is known as an excluded property trust. Under this banner the trust not be will never be seen as a part of your actual estate, even if you become UK-domiciled. This kind of trust is useful for foreign nationals who currently reside in the UK, or are planning to do so in the future.
The discretionary trust also offers a great deal of flexibility, there are a number of benefits that can be appointed to various classes of beneficiary, the terms of the benefits can be altered at a later date as well. If Inheritance Tax is not an issue then you may opt for the simpler succession trust.
The next question for the non UK domiciled individual is whether you wish to have the option of changing your beneficiaries. If the answer is yes then the flexible gift trust could be right, if no, the absolute gift trust.
A flexible gift trust is created with the intention of distributing capital to a number of discretionary beneficiaries. You yourself are excluded from the trust and it can be used to lower the actual value of their estate by allocating capital to selected beneficiaries. You can also gain Inheritance Tax exemptions if you buy making regular premium investments. If you make lump investments into the trust they will be seen as chargeable lifetime transfers. A 20 percent charge will be levied on the excess if the amount of the trust and any chargeable lifetime transfers from the last seven years exceed your nil rate band.
The absolute gift trust can be arranged to pay out to certain beneficiaries, however with this trust the named beneficiaries cannot be changed, nor can their respective share. This trust is also useful for individuals who are seeking to lower the actual value of their estate by allocating capital to selected beneficiaries. By making lump sum investments you can create what is known as a Potentially Exempt Transfer, or you can make smaller, regular investments to take advantage of yearly Inheritance Tax exemptions.
Now let’s look at this from the perspective of the UK-domiciled individual. If you are happy to give up complete access to your invested capital then you can go with the flexible gift trust or the absolute gift trust, covered above, your option respective of whether you want flexibility with regards to who is named as a beneficiary in the trust.
If you are only looking to give access to a portion of your invested capital, but still want flexibility over the named beneficiaries then your best option could be the flexible capital access trust.
The flexible capital access trust can be utilised when the creator intends to hold complete access to a specific amount of the premium, which can be anything between 5 percent and 90 percent, and also give a sum of money as a gift relating to Inheritance Tax. Because of the nature of this trust it is known as a split trust. As the creator of the trust you are able to access your portion of the trust at any time but the portion that is designated to your beneficiaries is off limits to you, and is looked on as a chargeable lifetime transfer. Note that if the allocated gift, along with any other chargeable lifetime transfers that you may have had over the last seven years, exceeds your nil rate band then your excess will be subject to a 20 percent charge. With the flexible capital access trust you can change your named beneficiaries at any time.
If you are happy to give access to a portion of your capital and do not feel you need change your beneficiaries than consider the absolute capital access trust. The absolute capital access trust mainly works in the same way as the flexible capital access trust- the creator intends to hold complete access to a specific amount of the premium, which can be anything between 5 percent and 90 percent, and also give a sum of money as a gift relating to Inheritance Tax. Because of the nature of this trust it is known as a split trust. As the creator of the trust you are able to access your portion of the trust at any time, but the sum allocated for the beneficiaries cannot be accessed by you. Also, you are not able to change the named beneficiaries or their respective percentage shares. As a gift the proceeds of the trust are seen as a potentially exempt transfer, if you live on for a further seven years this will be classed out of your estate.
Now let us examine the options available if you do not wish relinquish access to a portion of your invested capital. We must also ask if you intend to have the capital outside of your estate after a period of seven years? If the answer is yes, and you wish to have the flexibility of changing beneficiaries then the flexible discounted gift trust could be the right option. The flexible discounted gift trust allows you to lower your inheritance tax as soon as you create the trust, it also gives you the option of having lifetime regular payments that are tax efficient. The value of the allotted gift is determined by taking the value of your income payments and discounting the premium against that, taking into consideration your age, health and the discount rates at the time. The gift will be seen as a chargeable lifetime transfer. Note that if the allocated gift, along with any other chargeable lifetime transfers that you may have had over the last seven years, exceeds your nil rate band then your excess will be subject to a 20 percent charge. With the flexible discounted gift trust you can change your named beneficiaries at any time.
If you don’t want to relinquish access to a portion of your invested capital, intend to have the capital outside of your estate after a period of seven years but do not need to change your named beneficiaries then the absolute discounted gift trust could be the right option. The absolute discounted gift trust, like the flexible discounted gift trust, allows you to lower your inheritance tax as soon as you create the trust, it also gives you the option of having lifetime regular payments that are tax efficient. The value of the allotted gift is determined by taking the value of your income payments and discounting the premium against that, taking into consideration your age, health and the discount rates at the time. With the absolute discounted gift trust you are not able to change the named beneficiaries or their respective percentage shares. As a gift the proceeds of the trust are seen as a potentially exempt transfer, if you live on for a further seven years this will be classed out of your estate.
If you don’t want to relinquish access to a portion of your invested capital, and do not intend to have the capital outside of your estate after a period of seven years but still want to retain flexibility regarding your beneficiaries then the flexible loan trust may be the trust most suited to your needs.
The flexible loan trust is a good option for somebody who is domiciled to the UK and is not looking to relinquish access to capital and wants to mitigate inheritance tax. This trust is formed by giving the trustees a lump sum via the way of an interest free loan. As the creator of the trust you are not able to gain from any growth the bond may accumulate however you will still have access to your original capital via repayments on the loan. Any growth that the bond sees will fall outside of your estate. You are able to change your beneficiaries at any time.
Finally, if you don’t want to relinquish access to a portion of your invested capital, and do not intend to have the capital outside of your estate after a period of seven years and do not require flexibility regarding beneficiaries than your best option will be the absolute loan trust.
The absolute loan trust is the same as the flexible loan trust, it is for somebody who is domiciled to the UK and is not looking to relinquish access to capital and wants to mitigate inheritance tax. This trust is formed by giving the trustees a lump sum via the way of an interest free loan. As the creator of the trust you are not able to gain from any growth the bond may accumulate however you will still have access to your original capital via repayments on the loan. Any growth that the bond sees will fall outside of your estate. The difference is that beneficiaries and their respective percentage shares cannot be changed at a later date.