Trusts are no longer the most efficient way to pass wealth on down the generations, says Tax Tips & Advice.
From 5 April 2006, inheritance tax (IHT) at 20% is payable on gifts into most trusts above a certain value, and there’s further IHT payable every ten years equal to 6% of the taxable trust fund value.
An alternative, which attracts neither charge, is a Family Partnership (FP). With an FP, the donor sets up a partnership with the beneficiaries and they “agree amongst themselves how income and capital from the partnership is distributed”.
Unfortunately, partnerships “aren’t all plain sailing”. To be treated as a partnership, you have to carry on a business. This doesn’t have to be a trade, but someone needs actively to manage its investments on a daily basis.
To avoid FSA regulation, all the partners also need to be involved in the management of the partnership, so there ought to be, say, quarterly partners’ meetings.
Lastly, there are set-up costs, which start at around a few thousand. But “if you’re considering using a trust to gift assets worth more than £500,000, an FP is worth looking into”.