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I believe that the trust is an extremely useful instrument in managing one’s financial affairs. Potential uses can provide significant tax benefits in a wide range of areas from Income and Capital Gains Tax to Inheritance Tax. There are also potential non-tax benefits in certain areas including asset protection.
At that point, however, it is necessary to pause and to add a few words of caution. The mere fact that property is in a trust does not, of itself, guarantee that you will be successful in obtaining the sort of benefits you are looking for. Both the framers of tax legislation and the courts have sought to restrict those areas and you should, therefore, take proper professional advice from a trust specialist before undertaking any action.
I say that because I have become aware that certain trust-based schemes are out in the market place which do not necessarily do what they claim. Sometimes these schemes are also quite costly.
I have two particular areas of concern although you should also beware blanket assurances about asset protection on divorce or bankruptcy.
Firstly, there are those trusts which purport to provide security against local authority charges for long term residential care. I have seen plans involving the use of a trust which purport to give asset protection against the means test for residential care. The idea is that you give the property or cash to the trust and then you will be able to rest easy in the knowledge that the assets are secure for the next generation.
Unfortunately, there are specific regulations which stipulate that gifts made for the purpose of beating the means test are ignored. In other words, if your motive is just to avoid the charges, then the action simply hasn’t worked – whether the gift is to a trust or to other individuals. If you have other significant and credible reasons of course that may be a different matter but you had better be convincing.
Secondly, there is the matter of Inheritance Tax. If you simply put property or cash into a trust and you continue to use the property or receive the income then the trust property will still be treated as belonging to you for Inheritance Tax purposes. This is called a gift with reservation. Once again the action will not have worked. Like the care fees example, the legislation is not aimed specifically at trusts and would apply equally to gifts to family members.
Some plans apparently claim to be effective in both these areas but in reality work for neither. Some will also create new unnecessary tax liabilities.
Both long term care fees and Inheritance Tax liabilities are serious areas of concern to many people. It is quite natural to seek out solutions to what is seen as a real problem. In both areas, it is also often possible for legitimate and effective action to take place – and frequently this will involve the use of trusts.
If you have concerns in these areas, make sure you ask an expert first.
For more information on trusts or other forms of tax planning call freephone 0800 195 2161 or email firstname.lastname@example.org
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