For many years Trusts have been used primarily as vehicles to preserve wealth and avoid IHT. Though this is arguably not the purpose for which trusts were originally designed, the IHT saving qualities made their use particulary popular over the years.
Gifts to Trusts
Prior to March 2006 most lifetime gifts to Trusts were considered to be Potentially Exempt Transfers or PET's. As such, the gift would be deemed potentially free of IHT with the proviso that the donor survives for 7 years after making the gift. This applied to gifts to most types of Trust. However, since Gordon Brown's radical shake up of the taxation of trusts was enacted in March 2006, many lifetime gifts to Trusts were treated not as PET's but as Chargeable Lifetime Transfers or CLT's. The main difference between PET's and CLT's being that with CLT's Inheritance Tax is potentially payable immediately!
What is a Trust?
A Trust is a legal framework where a "Settlor" or "Donor" would pass assets to a trust. The "Trustee" of the trust would be appointed and become the legal owner of Trust property and it is their job to hold the property on behalf of the ultimate "Beneficiary" until such times as the Trust recitals direct the Trustee to pass ownership of the Trust assets to the Beneficiary.
When can a Trust be established?
Trusts may be established on death via instructions in a Will (Testamentary Trusts) for example or during ones lifetime (Lifetime Trusts).
Types of Trust
Whilst there are many different types of Trust arrangements, they broadly fall into two categories: "Discretionary" Trusts and "Fixed Interest or Bare" Trusts.
With a Discretionary Trust the person setting up the trust, known as the Setlor, does not name any specific beneficiary. In this type of Trust the Setlor instead chooses a class of potential beneficiares, such as their children or grandchildren leaving the trustees the power to determine who and how much (if anything) a potential beneficiary should receive and when.
Fixed Interest Trusts
A Fixed Interest Trust is created when a Setlor specifically identifies which beneficiaries will benefit from the Trust. The Setlor in this type of Trust will also stipulate exactly how and when those beneficiaries will take their interest in the Trust.