Trusts can be used to ensure assets are given to beneficiaries on death, without need for probate, or used to legally separate assets, from the donor’s estate, to potentially reduce inheritance tax liabilities.

Absolute (or Bare) Trust

An Absolute Trust is referred to as “absolute” because the neither the beneficiaries nor their share of the trust can be altered after the trust has been set up. Each beneficiary’s share of the trust is part of their estate and they can demand their part of the trust upon reaching age 18.

Gifts into Absolute Trusts are usually treated as Potentially Exempt Transfers (PET’s), for Inheritance Tax purposes, meaning that there is no tax payable when the gift is made and providing the donor lives 7 years, then no tax is payable.

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Discretionary Trust

Unlike Absolute Trusts, beneficiaries of Discretionary Trusts can be changed and do not have a fixed part of the trust fund allocated to them. While being held in the trust, none of the trust fund is deemed to be part of the beneficiary’s estate.

Gifts into Discretionary Trusts are treated as Chargeable Lifetime Transfers (CLT’s) and as such, need to be reported to HMRC if they are over the relevant limit and IHT returns are required every 10 years (subject to limits).

Gifts into Discretionary Trusts (depending on the size) can be subject to an initial tax charge, a 10-yearly periodic charge and a charge on exit.

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