Saving on IHT through discretionary trusts 

Andy Hogarth of Hazlewoods

Andy Hogarth of Hazlewoods - Credit: Will Pascall UK

Andy Hogarth of Hazlewoods shows us how to avoid the potential pitfalls of the inheritance tax

The inheritance tax (IHT) nil rate band has remained static for over ten years now and, following announcements earlier this year, will remain at this level until at least April 2026. During this time, property prices and investment values have continued to rise. This means that IHT, once only a consideration for the very wealthy, is now affecting many more families.  

Discretionary Trusts are one method of reducing your IHT bill, passing on money to your family and keeping some control over your wealth.  

What is a discretionary trust? 

A trust allows you to ring-fence assets, such as cash, investments, or property, for the future use of your beneficiaries. 

There are three main parties to the trust: 

  • The settlor – the person who makes the original gift. 
  • The trustees – those who have responsibility for managing and distributing the trust’s assets. 
  • The beneficiaries – the individuals who will receive income or capital from the trust. 

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Normally, the settlor will be one of the trustees, allowing you to retain some control of the trust assets. It is important to appoint at least one other person as a trustee, who has a good understanding of your circumstances and the objectives of the trust.  

Under a discretionary trust, discretion is provided to the trustees to decide who will benefit from the trust. Often the settlor will name ‘classes’ of beneficiaries as potential beneficiaries e.g. ‘to my children and remoter issue’. This provides flexibility as no beneficiary has predetermined right to the trust income or capital. 

How could a discretionary trust benefit you? 

The main benefits of a discretionary trust are: 

  • The capital will drop out of your estate after seven years. 
  • Any growth on the investment within the trust is outside of your estate immediately.  
  • You can still retain some control over the money, rather than making an outright gift.  
  • As there is discretion over the beneficiary’s, the trust funds are not considered to be in the estate of any of the beneficiaries, or as a marital asset of a potential beneficiary in the event of divorce. 

Disadvantages 

There are some disadvantages or key considerations in setting up a trust: 

  • To be effective for IHT planning, the assets must be out of your reach.  
  • The IHT benefit only applies if you survive for seven years after making the gift. 
  • Administration involved in running the trust 
  • IHT charges can apply at outset and during the term of the trust.  

A discretionary trust is just one potential solution for inheritance tax planning, and often a combination of approaches, implemented over several years, results in the best outcome.  

Hazlewoods Financial Planning can discuss your family and financial situation with you and help you determine the most efficient way of passing assets on to your loved ones, while ensuring your own needs are taken care of.  

Contact Andy Hogarth on 01242 680000 or andy.hogarth@hazlewoods.co.uk