The pros and cons of Discretionary Trusts |
Beneficiaries |
Advantage Can benefit any named person, e.g. a spouse (after death of settlor), a particular relation or category of persons, e.g. your children, your grandchildren, nephews, nieces, in-laws . |
Advantage Distribution of income and capital at trustees' discretion, and so can be done in a way that reflects circumstances at the time. Trustees, particularly a professional trustee, can be relied on to follow any informal "expression of wish" letter which you might leave. |
Length of trust |
Advantage There is no definite time limit, as in England, but 75 years would seem to be appropriate |
Capital Gains Tax on assets put in trust |
Advantage Capital Gains Tax can be "held-over" so that none is payable at time of transfer.
The trustees acquire the assets at cost. |
Inheritance tax (IHT) |
Disadvantage If your gifts into it within any cumulation period of 7 years exceed the nil-rate band, 20% lifetime gift Inheritance Tax is payable immediately. If you live 7 years after giving (say) £500,000, the slate is wiped clean (as with direct gifts) |
Disadvantage Tax of up to 6% once every 10 years on the value of the fund. |
Disadvantage Exit charge may arise when capital is taken out of the trust,depending on circumstances, but unlikely to be a significant amount unless the trust assets grow hugely. |
Advantage The trust can lend money to the beneficiaries, so avoiding increasing their estate. |
Advantage No inheritance tax on death of potential beneficiary |
Advantage You can give such a trust your annual exemption of £3000 and make gifts out of normal income into a trust without Inheritance Tax implications |
Disadvantage You must not benefit from your own trust in any way. |
| Income and Capital Gains Tax on the trust |
| Disadvantage The trust pays 40% income tax. |
| Advantage Any beneficiary who is a UK citizen can reclaim this tax to the extent that their own tax position allows.Children are often best placed to do this. |
| Disadvantage PEPs and ISAs cannot be put into the trust, so the securities and deposits in them would have to be removed from them first, thereby losing the tax advantages. However, no chargeable gain arises at the time of transfer of such securities. |
| Disadvantages A trust's annual CGT exemption is half the personal exemption1; above that, gains for the year are charged at 18%. |
Expenses |
Disadvantage Bennetts' typical fees and outlays for advising on and setting up a lifetime nil-rate band trust are in the region of £925, with a 50% discount on the second trust where two are established. Nil-rate band trusts in Wills are not subject to an extra charge. |
Disadvantage Annual running costs (tax returns, and stockbrokers annual management fees where applicable) will be about 0.5% on a trust with assets equivalent to the nil-rate band. Bennetts do not charge for management unless an formal annual account is required by the trustees or HMRC. They share any stockbrokers commission. |
