Ask Money: What's the solution to my investment success IHT 'problem'?

Would you like expert advice on a financial problem? This week, Patrick Connolly of Chase de Vere responds to a question about handing down wealth.

November 2, 2018

Solutions to investment success IHT problem

I enjoyed the excellent article in the September issue on trusts for managing inheritance tax. I’m in my early 70s with a comfortable pension and enough capital to be looking at a six-figure inheritance tax bill. It’s clearly time to take action. I’ve been mulling this over for a couple of years.

Giving the maximum away is the easy answer and some of this has been done, but I need to do more. In the long term, I would like it go down the generations, which can’t be guaranteed for various reasons with gifts. Also I quite enjoy investing the money. This is a hobby really, but modest success has produced the ‘problem’.

A trust would be the answer to benefits passing down the generations, but there are, I think, significant disadvantages: principally more tax and cost issues, and loss of management by the settlor.

In this latter regard, I have a couple of questions: can either the settlor and/or beneficiaries be trustees, and what are the rules governing the appointment of trustees?

It would be most useful to read a detailed article on setting up trusts, DIY routes and the experience of others.

John Andrews, by email


Patrick Connolly at Chase de Vere replies: A range of different trusts could be useful for inheritance tax planning. You need to select the right one and then make sure it is set up properly if it’s going to be effective, and you also need to be aware of the benefits, drawbacks, restrictions and possible charges.

A trust is a legal arrangement where one or more trustees are legally responsible for holding assets for the benefit of one or more beneficiaries. The creation of a trust is a transfer of value for inheritance tax purposes, which means that tax could potentially be payable when the trust is set up, particularly if larger sums are moved into a trust.

The person creating the trust will appoint the initial trustees. A trustee can be any adult who has full mental capacity. However, you’ll need to make sure that they’re willing to be a trustee and that you’re confident they can perform the required duties. It is common for the settlor to be a trustee, which means they can have a degree of control over management of the trust assets.

However, with some trusts, you need to be careful to ensure that the settlor isn’t also a potential beneficiary, as HMRC could regard this as a reservation of benefit, making it ineffective for inheritance tax purposes. A beneficiary can also be a trustee. Where trustees have discretionary powers, it is advisable to have at least one independent trustee who can’t benefit from the trust.

If you need help with a tax, pension or financial planning problem,  please email: moneyobserver.ed@moneyobserver.com

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