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Passing On Wealth At Your Discretion

What would you do if you came into a significant sum of money, whether through an inheritance, the sale of a property or business, or some other good fortune? Many people would like to permanently set something aside to benefit their children, grandchildren or others but retain some control.
Read on to find out how the law provides an answer in the form of a Discretionary Trust.

The person creating the trust, called the settlor, will nominate the trustees and of course the beneficiaries. The settlor may also be a trustee. This information and all the other provisions will be set out in a trust deed drawn up by a solicitor. Putting assets into a Discretionary Trust is an irreversible step.

The trustees will be responsible for managing the trust property and will often use a financial adviser or stockbroker. The trustees will jointly make the decisions about which beneficiaries get income and capital and at what ages. A key advantage of the Discretionary Trust is this flexibility – the trustees decide who gets what and when.

There may be tax consequences. If more than the nil rate band for Inheritance Tax (currently £325,000) is put into a Discretionary Trust, there will be an immediate tax charge of 20% of the value above the nil rate band. There will be a further charge if the settlor dies within seven years. There will be a charge every ten years of 6% of the value above the nil rate band. Exit charges also apply as a proportion of the 6% charge. There is better news on Capital Gains Tax, because it is possible to claim hold-over relief when assets are put into a Discretionary Trust.

The trustees will also have to pay Income Tax annually on any income at rates from 10% up to 45%.

It is not usually advisable to create a Discretionary Trust of less than £50,000 (some financial advisers would say £100,000) because of the administrative costs. Other types of asset such as shares or a property can be put into the trust.

Author: Matthew Penley

WSP Solicitors

DISCLAIMER: This article should not be regarded as constituting legal advice in relation to particular circumstances. This article is merely a general comment on the relevant topic. If specific advice is required in connection with any of the matters covered in this article, please speak to WSP Solicitors directly.

Published on 4th July 2013
(Last updated 28th March 2018)

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