In this section:
Inheritance Tax may be due when assets are put into a trust. How much depends on the type of trust and value of assets in it, the value and timing of the transfer and whether the donor continues to benefit from the gift.
On this page:
The person who puts assets into a trust is known as a 'settlor'. A transfer of assets into a trust can include buildings, land or money and can be either of the following:
For most types of trust Inheritance Tax is due when you make transfers that total more than the Inheritance Tax threshold (£325,000 in 2013-14 tax year). You work this out by adding up the value of any transfers (based on the loss in value to the settlor's estate) and any chargeable gifts made in the previous seven years by the settlor. Inheritance Tax is due on everything above the threshold.
If the trustees pay, the rate of tax is 20 per cent. If the settlor pays the Inheritance Tax instead of the trustee, this means there will be an increased loss from the settlor's estate. The amount of tax due will therefore increase. These calculations are complex.
If Inheritance Tax is due on your transfer into a trust you'll need to fill in the following forms:
If you die within seven years of making a transfer into a trust your estate will have to pay Inheritance Tax at the full amount of 40 per cent. This is instead of the reduced amount of 20 per cent which is payable when the payment is made during your lifetime.
In this case your personal representative - who manages your estate when you die - will have to pay a further 20 per cent out of your estate based on the value of the original transfer.
If no Inheritance Tax was due when you made the transfer, the value of the transfer is added to your estate when working out whether any Inheritance Tax is due.
If you make a gift into any type of trust but continue to benefit from
the gift - for example, you give away your house but continue to live
in it - you will pay 20 per cent on the transfer and the gift will still
count as part of your estate. These are known as gifts 'with reservation
of benefit' - find out more by following the link to 'Passing on your
home to your children' below.
This creates a situation where there are two possible Inheritance Tax charges if you die:
To avoid double taxation, only the higher of these charges is applied - in other words you won't ever pay more than 40 per cent Inheritance Tax.
You don't have to pay Inheritance Tax immediately if you make a gift to a trust for someone who is disabled.
Remember though that Inheritance Tax may still be due when you die - see the sections above.
Find out more about how Inheritance Tax applies to trusts for someone who is disabled in the guide below.