Martin Lewis expert warns savers over ‘immediate 20 per cent tax charge’

Martin Lewis and his panel of experts have examined the limits and rules Brits using trusts should watch out for. They looked at the pros and cons of trusts when it comes to trying to avoid Inheritance Tax - which affects around four percent of households in the UK - on the The Martin Lewis Podcast.

Speaking on the show, Keiran Bowe, partner at Russell Cooke and a specialist in wills, defined a trust as “somewhere to place your assets” while giving a trustee full control of “how those assets are managed and who can benefit”. Keiran noted that the person who creates the trust and places the assets into it will have the ultimate say in defining the terms of the trust and deciding who will benefit from it.

Martin asked why Brits would go down this seemingly more complicated route instead of simply giving assets away through inheritance. The expert explained: “Many people in the past have put assets into trusts to avoid inheritance tax, or to shield assets for purposes of protection for the benefit of future generations.

“The regime around trusts now is becoming much more complex and more challenging.” With that in mind, Keiran had one major warning for anyone considering opening a trust for inheritance purposes: “If you are placing assets into a trust in your lifetime and they exceed the nil rate band at £325,000, there is an immediate charge for inheritance tax at 20 percent.”

It doesn’t end there, as Keiran continued: “Then an additional 20% potentially applied if we pass within seven years, subject to the taper relief.” This adds up to the current 40% Inheritance Tax rate, negating any tax savings the person may have been trying to get through making the trust.

Carrie Bellan, chartered tax advisor, chimed in to say she does advise some of her clients to create trusts and pointed out the gifting exemption applicable to general Inheritance Tax applies to trusts as well, but with an extra requirement. She explained: “That can only be achieved if you, the person setting up the trust, don’t benefit.

“I see lots of clients who have set up a trust for their own benefit thinking they’ve avoided inheritance tax, but they’re not. The trust is still deemed to be part of their estate.” Carrie also noted that any children listed as beneficiaries need to be over the age of 18.