Advantages of using a family discretionary trust

1st August 2019

Many people are looking for ways to make financial provision for their children and grandchildren in later life. Junior ISAs can be used or investments made into designated accounts but the child will have full access to the funds once they turn 18, so there is no guarantee that money intended for university costs or a first house deposit is actually used for those purposes.

An option which can be used to make a gift immediately while maintaining long-term control is to create a discretionary trust, with the children and grandchildren as beneficiaries. The settlor of the trust can also be a trustee and, if the terms of the trust give a wide discretion as to when payments are made to beneficiaries, the trustees can determine when and to whom payments are made. To be effective for tax, it is important that a lifetime trust cannot benefit the settlor of the trust or their spouse.

Making a gift into a discretionary trust is a chargeable lifetime transfer for Inheritance Tax purposes, but as long as no transfers have been made in the previous 7 years, no Inheritance Tax will be immediately payable on gifts into trust of up to £325,000.

Using a trust does come with a number of administrative requirements. In addition to the initial trust deed which should be completed by a solicitor, the trust will have to pay tax on any income and capital gains and is likely to need to be registered with HM Revenue & Customs. There may also be Inheritance Tax charges on every 10-year anniversary and when capital is paid out of the trust. In order to make best use of the available tax allowances, we would recommend instructing a tax adviser for all but the simplest trusts.

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