Trusts and Deeds of Variation FAQs
- 29 March 2021
- 5 mins reading time
On 16 March 2021, we hosted a webinar in which we discussed tax, trusts and deeds of variation. This briefing considers some of the most frequently asked questions relating to trusts and deeds of variation.
What is a trust?
A trust is a legal entity into which someone (the settlor) can put assets with the agreement that the trustee will look after those assets, usually for the benefit of a third party (the beneficiary).
For example, grandma might set up a trust with the help of a bank (the trustee) to make sure that her assets are passed on to her descendants according to her wishes before or after she dies.
Who can benefit?
In most cases, the beneficiaries are the descendants of the person setting up the trust. But they can also be friends or charities. You can be a beneficiary of a trust you set up as the settlor, but you would not be able to save on inheritance tax liabilities in such a case.
When can a trust be set up?
You can set up a trust during your lifetime, or include the setting up of a trust as part of your will.
If you set up a trust during your lifetime, you start a seven-year clock ticking. If you survive for seven years after placing the assets into the trust, then no inheritance tax will be due above the exemptions.
The seven-year rule does not apply in the case of a deed of variation trust (see below).
Exemptions to inheritance tax
These are assets which do not attract inheritance tax. For example, any surplus income, gifts to charities or your annual allowance (which may vary from person to person).
Why set up a trust?
The overriding purpose of a trust is to give benefit to people further on down the line. In many cases, this is to reduce inheritance tax according to the government guidelines that allow for this.
But there are other reasons as well.
To provide control over what happens to the assets.
To give protection, perhaps to someone who is young or who would benefit from a drip-feed of money over time.
Privacy. Unlike a will, a trust is a private arrangement (though this might change in future). This could enable you to provide something for someone without other people knowing.
Statutory. The law will create trusts in certain circumstances, such as when a minor inherits money.
Vulnerability. For example, somebody who is mentally impaired might need help and guidance in managing the assets being passed on to them.
What are the trustee’s responsibilities?
The trustee is the person or entity that holds the assets on behalf of the beneficiaries. Therefore, the trustee must be dependable and trustworthy. They would also need to understand the terms of the trust and be able to maintain records, deal with taxation issues, produce periodic statements of account and keep up with the regulations that apply to trusts.
What is a deed of variation?
A deed of variation allows the beneficiaries named in a will to change the distribution of what they’ve inherited. The inheritor can instigate a deed of variation while also being included as a beneficiary.
For example, the beneficiary can reduce the effect of Inheritance tax after receiving an inheritance which might have enhanced their own liability to inheritance tax.
A deed of variation must take place within two years of the date of the death, but the seven-year rule of gifting before death does not apply because the assets are effectively taken out of the estate and placed in trust.
The chart shows a hypothetical example of how a deed of variation might work. Rather than passing the £200,000 inheritance down from generation to generation, it could be placed by the inheritor into a deed of variation trust. In this example, it would eliminate the £128,000 inheritance tax charged overall. This doesn’t mean that’s how it would necessarily work for you, as your circumstances are unique, but it gives you an idea of the mechanics.
To determine if a trust might be beneficial for you and your loved ones you need to consider:
The legislative and taxation regulations within which trusts must operate.
The reasons for setting up a trust.
Your unique circumstances.
For these reasons we, and our trust-specialist partners at Lloyds Banking Group, strongly recommend that you get professional financial advice before taking any steps towards setting up a trust.
To speak to a Schroders Personal Wealth adviser about trusts, call 0808 109 2071.
The value of the funds invested in a trust can go down as well as up.
Any views expressed are our in-house views as at the time of publishing.
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