Planning to pass assets to heirs? Set up a trust whilst asset values are low, say lawyers
People who were thinking about setting up a trust for their children and grandchildren should consider doing it now whilst asset values are low following the blow to the economy from lockdown, says Wilsons, a private wealth law firm.
Wilsons says that assets transferred into a trust are classified as a gift and fall outside the scope of inheritance tax (IHT). The person passing on the assets can retain control as a trustee - which is often preferable to giving large sums of money outright.
Assets with a value of up to GBP325,000 can be settled without an IHT charge, but incur a charge of 20 per cent up front on any additional value. This may rise to as much as 40 per cent on the death of the person gifting the assets, if it occurs within seven years. The GBP325,000 threshold can be used once but is renewed every seven years.
While asset values are down, a greater number of assets can be settled without a charge to IHT, and any increase in value occurs in the trust, not in the donor's estate. The cost is a separate IHT charge on trust assets worth over GBP325,000 of up to 6 per cent on each ten year anniversary of the original gift to the trust.
Lower asset values also mean a lower capital gains tax charge on a transfer to the trust, although holdover relief can defer capital gains tax until a sale by the trustees.
Whilst the FTSE100 has recovered some of its lost ground, many shares that are popular amongst private investors are down by very significant percentages. Transferring underperforming shares to a trust now could mean more value is effectively removed from the donor's IHT estate if their price subsequently recovers.
Wilsons says that although the opportunity for a capital gains tax uplift in value on the death of the donor is lost, and gains made on assets are still liable for capital gains tax, at 20 per cent this is likely to be significantly lower than the 40 per cent that would otherwise be charged on the full value of an asset through IHT (on the value of the estate over the GBP325,000 threshold).
Trusts are popular amongst those who wish to pass on assets to family members who may be too young to receive large sums of money, or others who may not be capable of managing their own affairs.
Rupert Wilkinson, Partner at Wilsons, says: “A knock-on effect of coronavirus is economic uncertainty and as a consequence asset values have fallen. Now could be a good time for people who have been considering settling assets on trust to act. One silver lining from lower asset values is the potential for settling more assets by number (if not value) on trust without a tax charge”
“Trusts are ideal for those who wish to make provision for their children but would rather they receive the money at a point in time after the gift, perhaps over a period or when they are much older. The person who is giving the money away can still control the money and ensure that it won’t all be squandered by the intended recipient, which could be a risk if it was given directly.”