thetimes.com
Trusts in the UK: Tax Implications and Costs
The number of active trusts in the UK has risen to 733,000 in August 2024, highlighting the increasing use of trusts for estate planning and tax reduction, but their complexity leads to potential pitfalls.
- What are the primary tax benefits and risks associated with using trusts in the UK?
- Trusts can reduce or eliminate inheritance tax by removing assets from a benefactor's estate. However, incorrect implementation, as seen with Angela Rayner's case resulting in a potential £40,000 stamp duty liability, can lead to unexpected tax bills. Furthermore, discretionary trusts incur an immediate 20% inheritance tax on assets exceeding £325,000, plus further 6% charges every 10 years.
- What are the different types of trusts, and how do they impact tax liabilities differently?
- Bare trusts offer simplicity but lack flexibility, transferring assets to beneficiaries upon reaching adulthood. Discretionary trusts allow benefactors to retain control and adjust asset allocation, but they are subject to inheritance tax on assets above the £325,000 threshold. Both types can help reduce inheritance tax if properly structured but the complexity of this structuring can easily lead to errors.
- What are the long-term implications and potential costs associated with establishing and maintaining a trust?
- While trusts can offer long-term asset protection, lasting up to 125 years for discretionary trusts, this longevity comes with ongoing costs. Initial setup fees range from £5,000-£12,000, with annual maintenance fees of £3,000-£5,000 for professional trustees or £500-£800 for those managing the trust independently. Capital gains tax may also apply upon eventual asset sale, regardless of trust type.
Cognitive Concepts
Framing Bias
The article presents a balanced view of trusts, highlighting both their benefits and potential drawbacks. While it starts by emphasizing the tax advantages, it quickly introduces the risks and complexities involved, exemplified by the Angela Rayner case. The inclusion of diverse expert opinions from lawyers further enhances the neutrality of the framing. However, the use of a negative example in the headline and beginning of the article might negatively prime the reader, even if the article fairly presents other aspects of trusts.
Language Bias
The language used is largely neutral and objective. Terms like "foolproof" and "painful lesson" are used but are presented within a balanced context, avoiding excessive emotional loading. The use of precise figures and legal terminology maintains objectivity. However, phrases like "backfire" and "surprise tax bill" could be considered slightly emotive.
Bias by Omission
While the article covers various aspects of trusts, it could benefit from including information on the different types of discretionary trusts and their respective tax implications. Additionally, a discussion of the ethical considerations surrounding the use of trusts, particularly regarding wealth inequality, might be valuable. The omission is likely due to space constraints, rather than intentional bias.
Sustainable Development Goals
Trusts can help reduce inheritance tax, a tax that disproportionately affects wealthier individuals. By enabling more equitable distribution of assets, trusts can contribute to a reduction in wealth inequality, although this is not their primary purpose. The article highlights how trusts can help families manage assets and plan for inheritance, which can indirectly contribute to more equitable distribution of wealth across generations, thus aligning with the goal of reducing inequalities. However, the complexity and potential pitfalls of trusts might hinder their effectiveness for less wealthy families.