Expert Martin Lewis warns savers of ‘immediate 20% charge’

Martin Lewis and his panel of experts examined the limits and rules that Britons using trusts should be aware of. They debated the pros and cons of trusts when it comes to trying to avoid inheritance tax – which affects around four per cent of UK households – on the Not the Martin Lewis Podcast.

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

Martin asked why the British would take this seemingly more complicated route instead of simply giving assets by inheritance. The expert explained: “Many people in the past put assets into trusts to avoid inheritance tax or to protect assets for protection purposes for the benefit of future generations.

“The regime around trusts is now becoming much more complex and challenging.” With this in mind, Keiran had a major warning for anyone considering opening a trust for inheritance purposes: “If you place assets in a lifetime trust and they exceed the nil threshold of £325,000, there an immediate inheritance tax. 20 percent tax.”

It doesn’t end there, as Keiran continued: “Then an additional 20% can apply if we move within seven years, subject to the taper.” This is on top of the current inheritance tax rate of 40%, canceling out any tax savings the person may have tried to achieve by setting up the trust.

Carrie Bellan, Chartered Tax Adviser, chimed in to say that she advises some of her clients to set up trusts and pointed out that the general inheritance tax gift exemption also applies to trusts, but with an additional requirement. She explained: “This can only be achieved if you, the person who created the trust, do not benefit.

“I see a lot of clients who have set up a trust for their benefit thinking they’ve avoided inheritance tax, but they don’t. The trust is still considered to be part of their estate.” Carrie also noted that all children listed as beneficiaries must be over the age of 18.