Trusts are often misunderstood. For many, they conjure images of secretive offshore accounts or the exclusive domain of the ultra-wealthy.
The reality is more grounded, and more relevant. Trusts have been a cornerstone of estate planning for centuries, offering a legally robust framework to protect assets, maintain control, and significantly reduce tax liabilities.
As more individuals seek to safeguard their wealth in the face of rising tax exposure, understanding trusts has never been more important.
(Read Time: Approx. 4 minutes)
Topics Discussed:
- How trusts protect family wealth and insulate assets from external threats
- The tax advantages of using trusts, particularly for inheritance planning
Understanding Trusts: Control Without Ownership
The central feature of a trust is this: it allows you to relinquish legal ownership of an asset, without losing influence over how that asset is used or distributed.
The asset is transferred into a legal structure (the trust), managed by trustees for the benefit of named beneficiaries.
This separation of legal ownership and beneficial entitlement is where the power of a trust lies. It allows individuals to:
- Retain strategic control: While you no longer own the asset personally, you can set the terms: when and how beneficiaries receive it, what it can be used for, and under what conditions.
- Protect assets from claims: Assets held in trust are generally not considered part of your personal estate. This can provide protection from divorce proceedings, creditor claims, or spendthrift beneficiaries.
- Preserve wealth across generations: Trusts are frequently used to ensure assets are passed on in a controlled manner, particularly where younger or less financially astute family members are involved.
- Maintain privacy: Unlike wills, which become public documents after death, trusts remain confidential.
These non-tax advantages alone can make trusts a compelling option. But for many, it is the tax planning that elevates their importance.
The Capital Gains Tax Obstacle – Section 162
In the UK, trusts are especially useful in the context of Inheritance Tax (IHT), which is charged at 40% on estates above the nil-rate band threshold.
1. Nil-Rate Band Planning
An individual can transfer up to £325,000 into a trust every seven years without triggering IHT. For couples, this can be doubled. With careful planning, multiple transfers can be made over time, steadily removing assets from the taxable estate.
2. Growth Outside the Estate
Assets transferred into trust can be ‘frozen’ in terms of their value for IHT purposes. Future growth accrues outside the estate, benefiting the next generation without compounding the tax exposure.
3. Loan Trusts
A popular mechanism involves lending money to a trust rather than gifting it outright. The loan remains part of your estate (and can be repaid), but any investment growth within the trust sits outside it. This caps the estate value while enabling tax-free growth for beneficiaries.
4. Deferred Capital Gains Tax (CGT)
Gifting assets into trust can trigger CGT, but with the right reliefs in place, this can be deferred until the asset is eventually sold. This enables forward planning without an immediate tax hit.
5. Income Tax Planning
Although trusts have their own tax regime, careful structuring can mitigate exposure to higher-rate tax charges, especially where income can be allocated to beneficiaries with unused personal allowances or lower marginal rates.
Real-World Example: Using Trusts and Holdover Relief
Let’s say you own a property worth £3 million. If that remains in your estate and you pass away, the Inheritance Tax at 40% would be £1.2 million, almost half the value gone.
Now, if you were to transfer that property into a discretionary trust, there would usually be Capital Gains Tax (CGT) due on the uplift in value. But this is where Holdover Relief steps in.
Holdover Relief allows you to defer the CGT on the transfer by “holding over” the gain until the trust eventually sells the property. That means:
- No immediate CGT is payable when you set up the trust
- The trust takes on your original base cost
- The tax liability is deferred, often for many years
In the case of our £3 million property, let’s say you originally bought it for £500,000. The gain is £2.5 million.
Normally, that would trigger CGT of up to £700,000+. With Holdover Relief, you defer the gain, and your estate is reduced by £3 million immediately for IHT purposes, subject to surviving seven years.
If structured correctly, you can also allocate rental income from the property to your children or grandchildren, manage how the asset is passed on, and avoid probate delays.
It’s one of the most powerful tax tools available to reduce both CGT and IHT, especially on high-value assets like property or shares in a family business.
Why Trusts Are Relevant Now
Trust planning is gaining renewed attention following recent fiscal policy shifts and anticipated reforms to wealth taxation.
With inflation placing pressure on capital and the government eyeing new revenue streams, individuals with even moderate levels of wealth are rightly concerned about long-term preservation.
They work particularly well alongside other planning tools such as family investment companies, wills, and tailored estate structures.
Summary
Trusts offer serious advantages: control, privacy, and big tax savings. With tools like Holdover Relief, you can pass on assets like property without triggering huge tax bills.
Thinking of setting one up? Email us at Tax Expert for tailored advice on the best trust structure for your situation.
Fill out our form here for any questions, email us at info@taxexpert.co.uk, or message us on our WhatsApp for out of office hours.
Kind regards,
Ilyas Patel