I Protected My Estate With a Trust: Case Study

Inheritance Tax is a common gripe amongst property owners. Originally intended to break up some of the great estates upon the death of their owner, it has failed to keep up with modern property prices. Today, many thousands of people find themselves forced to take action to avoid Inheritance Tax – or have the value of their estate dramatically reduced when it is eventually passed on to their beneficiaries.

People have adopted a variety of approaches to help them deal with the problems associated with Inheritance Tax. One of these approaches is the establishment of a trust. We spoke to Paul, a man who has made trust arrangements in an effort to mitigate the impact of Inheritance Tax.

Business owner

“I have never been what I would call ‘rich’,” Paul told us. “I have run my own business for most of my working life, and while I’ve never been struggling for money, I’m certainly not wealthy.

“But I’m planning on retiring next year, so I started to think about making provisions for myself, and for my family in the longer term. I sat down with a financial adviser, and one of the first things he told me was that I needed to think about Inheritance Tax.”

Family home

Paul sold a share in his company a few years ago, and used some of the proceeds to buy a larger house. “I was lucky enough to be able to buy in cash, so I don’t have a mortgage to worry about. As it happens, my house is worth more than the Inheritance Tax threshold, which I simply hadn’t thought about at the time.”

Paul’s financial adviser told him that he should consider ways to protect his estate from Inheritance Tax, in order to make sure that his beneficiaries got the true benefit of his assets.

“I’m not married, so there was no question of me having someone to pass things on to without incurring Inheritance Tax. Given that my home is my biggest asset, I realised that my children might have to sell it in order to settle the Inheritance Tax bill. So instead, I arranged for a trust.

Paying out

“The trust will hold a few different assets, including shares in my business. I have appointed professional trustees, who will pay out income to my children on a regular basis.

“Then, at a suitable time, the house will be sold and the children will take the proceeds. I realise that there will be a tax implication at this point, but as I understand it this will be less severe than an Inheritance Tax charge on all my assets above the Inheritance Tax threshold.”

Paul has spent significant periods of time with his financial adviser, and has developed a full plan for his assets. You should remember that decisions relating to tax can have lasting and major implications for your financial affairs. So if, like Paul, you are concerned about Inheritance Tax, make sure that you seek independent financial advice before taking any action.