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Many will consider how the estate may only have to pay a fraction of the Inheritance Tax
Following the tragic untimely death of the Duke of Westminster earlier this week, many will consider how the estate of the third richest man in Britain may only have to pay a fraction of the Inheritance Tax that would otherwise have been owed, had clever trust structures not been utilised.
Gerald Cavendish Grosvenor, the sixth Duke of Westminster, inherited his estate aged 27 despite having two elder sisters, as a result of the rule of primogeniture which states that title can only pass to male heirs. His wealth is estimated at £9billion and assets from which he has benefitted include 190 acres in Belgravia, as well as land in Scotland, Spain and North Wales.
Typically the value of an individual’s estate on death (for anything above the nil-rate band) is subject to Inheritance Tax at the rate of 40%. However, the inheritance of the estate by the late Duke’s son, Hugh Richard Louis Grosvenor, will not trigger quite the same vast Inheritance Tax bill you would expect with an estate of this size. This is partly because many of the assets will have been placed in a series of trust structures, which serve to legally minimise any Inheritance Tax liability. There will also have been the use of family companies to share the wealth, and reduce the value of each share, because for tax the value of the individual parts does not necessarily equal the value of the whole.
Sizeable assets are placed in Trusts so that the successive generations are trustees, rather than direct owners, of the assets. As a result the Duke, Hugh and any other successors are not the beneficial owners of such assets. The assets in such trusts therefore cannot form part of their estate taxable on death and will not be subject to an automatic 40% Inheritance Tax bill on death.
Furthermore, some of the assets are likely to be structured in such a way as to qualify for reliefs which can exempt up to 100% of the value of the asset from Inheritance Tax. These are likely to include Agricultural, Business Property, Heritage and Woodlands Reliefs.
How you can use Trusts to minimise your Inheritance Tax?
The creation of trusts can offer huge Inheritance Tax advantages. Certain types of trusts do not form part of an individual’s estate and therefore are not taxed at the full 40%, but instead are subject to a periodic charge at a maximum of 6% every ten years. Following the Finance Act 2006, the creation of a lifetime trust may be immediately chargeable at the lifetime rate (currently 20%). However, no tax will be due if the value of the gift is below the donor’s available nil-rate band. A couple, between them, can make gifts this way exceeding £650,000, without an immediate tax charge.
A trust can be for generations, as with many landed estates, or can be intended to be relatively short term – a method of starting the 7 year clock ticking (towards the gift escaping Inheritance Tax) without fully relinquishing control over the asset if the beneficiary is too immature.
Trusts can also provide flexible solutions to family issues. They can be used to provide for a spouse, preserve assets for future generations, hold assets for children or grandchildren until they reach an age where assets can safely be transferred to them, or to protect vulnerable beneficiaries.
Other ways to minimise Inheritance Tax liability
Setting up a trust and the on-going administration involves time and money. Although this, as in the Duke’s case, can be very well spent, there are less other ways in which the amount of Inheritance Tax payable on death can be minimised.
Consider using your annual and small personal allowances, making gifts to charity (but in your Will for an extra benefit) and making gifts from income.
Inheritance Tax planning and setting up a trust can be complicated and require careful consideration from the outset. Our Private Client team take a straight forward and friendly approach and their aim is provide you with the most effective solution that fits your requirements. If you would like help on this, please see our guidance notes and contact one of our solicitors:
Northampton - Catherine Ball, on 01604 463337 or click here to email Catherine.
Cambridge - Bernadette O'Reilly, on 01223 532763 or click here to email Bernadette.
Milton Keynes - Carolyn Bagley, on 01908 247015 or click here to email Carolyn.
London - Francesca Rossi, on 020 7400 5037 or click here to email Francesca.Many will consider how the estate may only have to pay a fraction of the Inheritance Tax