Discretionary Trust

When a discretionary trust is created, the settlor gives the trustees the `discretion` as to how to use the assets within the trust.  The extent this discretion depends on the terms of the trust deed.  The trustees are responsible for managing the trust for the benefit of the beneficiaries.

This type of trust is commonly used to mitigate inheritance tax liability.  IWC can arrange that in the event of your death, capital is transferred into a nil rate band trust.  For more information about how this could benefit you and your family, Call us now on 0800 612 6105.

The Role of Discretionary Trusts in IHT Planning

Prior to 2007, when the Law changed, a discretionary trust was exploited to enable the utilisation of both nil rate bands.  For joint estates of less than £650,000, this is no longer necessary (at the time of writing) because the new law means NRBs are transferable.  However, they are of great importance in other circumstances.  Here is a simple example outlining why they still play a major role in Making a Will and Estate Planning.

Using a Trust to Mitigate Tax

Mr & Mrs Smith buy a house in 2014 for £650,000, they convert to Tenants in Common (so they have £325k of equity each) and have Wills drafted so as to include the Nil-Rate Band Discretionary Loan Trust (NRBDLT).

That year Mr Smith passes away and his then nil rate band of £325k is passed to the NRBDLT. This is set up by our Probate team such that an equitable charge is arranged which is linked to the House Prices index. The property market over the next 5 years recovers and the loan/debt increases at a faster rate than increases to the Nil Rate Band.

2 years later, in 2016 Mrs Smith dies.  The property has now risen in value to £850K. Mrs Smith`s half of the property is now valued at £425,000 and the NRB allowance in 2014 let`s assume will be £400,000.

Therefore, Mrs Smith`s taxable estate, after the loan to the Nil Rate Band Discretionary Trust is re-paid is:

Half her house of £425,000 less the 2014 nil rate band of £400k

i.e. Taxable estate = £425000-£400000 = £25,000

The inheritance tax actually paid on this amount is 40% which equals £10,000 tax.

Therefore Mrs Smith`s estate has a tax bill of £10,000.

Had Mr Smith`s Will not included the trust, Mrs Smith`s estate would now be the full value of the house which is £850,000.

She would then of course benefit from a double nil-rate allowance so her taxable estate would be £850,000-£800,000 = £50,000.

The inheritance tax on this amount would be 40% which equals £20,000.

This equates to £10,000 more tax under the new scheme.

Expert Advice from IWC

Experts at IWC can assist you with a range of solutions to lessen IHT liability including professional will writing, estate planning, IPDI trusts and pilot trusts.  We can visit you at your home and discuss a detailed plan to ensure that your estate is completely inheritance tax efficient.

For more information about using a discretionary trust for tax mitigation, contact us free on 0800 612 6105, lines are open until 10pm, 7 days a week.