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What Are the Alternatives to Trusts?

By: J.A.J Aaronson - Updated: 12 Nov 2010 | comments*Discuss
Iht Equity Inheritance Tax Estate Assets

Trusts provide a valuable means by which you can lower or eliminate an Inheritance Tax bill for your beneficiaries. They have become an important part of the arsenal used by those involved in inheritance planning; if you seek professional advice on lowering your Inheritance Tax (IHT) bill, it is almost certain that trusts will be discussed at some point. However, it is important to remember that trusts are not the only tool at your disposal. Indeed, there are other IHT tools that may be even more useful, depending on your circumstances.

Gift it or spend it

The primary concept in IHT avoidance is to minimise the size of your estate, or to legally separate yourself from a proportion of your assets. The obvious way to reduce the size of your estate is simply to spend it. Treat yourself to a holiday!

Alternatively, you can give away assets, perhaps to those who you had planned to be your beneficiaries anyway. Gifts between you and your spouse or civil partner are always tax free, presuming that you are both domiciled in the UK. You can also give away money to other individuals, such as children and, providing it is made from surplus regular income (rather than from savings), it will also be exempt from IHT.

Equity release

Many people have the majority of their income tied up in property and, as a result, they may find it difficult to spend or give it away. If this is true in your case, you may wish to consider equity release schemes.

Equity release means that you can either borrow against the value of your home, or you can sell part of your property – but continue living in it. These schemes are known as lifetime mortgages and home reversion, respectively.

While attractive in the short term, equity release schemes can pose some significant problems. To begin with, if the value of your property falls you may find yourself in negative equity – as the recent collapse in house prices has illustrated. Furthermore, equity release can come with a significant interest rate. You should be careful that your debt does not mount up to the point where your beneficiaries are actually inheriting no more than they would if they had to pay IHT.

You should always seek specialist advice from an independent advisor before entering into an equity release arrangement.

Potentially Exempt Transfers

While some gifts, such as those made between UK-domiciled spouses or civil partners, are always exempt from IHT, others are treated as ‘potentially exempt’. This means that they will not attract IHT as long as you live for at least seven years after they are made. For example, you could give money to your children that they would otherwise have inherited but that would have endured an IHT reduction and, providing you survive the gift by seven years, the money will not be taxed. This is particularly useful if you already know who you intend your beneficiaries to be, and has the added advantage of allowing you to see the benefit of your gift.

Of course, there are still circumstances in which trusts may be the best option. There are several articles on this site explaining when this might be the case.

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