Moving Capital Out of Your Estate Efficiently
Trusts continue to play a vital role in intelligent estate planning, particularly when looking to move capital out of an estate efficiently and securely.
I am currently advising clients who are doing exactly that by moving £650,000 into trust, structured as £325,000 multiplied by two to utilise both available Nil Rate Bands and start the seven year clock running. After that time, the value sits outside of the estate for inheritance tax purposes, potentially saving £260,000 in inheritance tax.
The question we have been exploring is which actual trust structure to use. That is where it gets interesting, because the right answer depends on your goals, access requirements, family dynamics and tax priorities.
Three Main Trust Routes
- Gift Trust
The cleanest and simplest option. Gift the full £650,000 to your nominated trustees now, starting the seven year clock immediately. After seven years, the entire amount plus growth sits outside your estate. There is no retained access to the capital, but full IHT relief after the period ends. Simple, decisive, and absolute.
- Gift and Loan Trust
Here the capital is split, part gift, part loan. The loan element can be repaid to you gradually over time, while the growth on the gifted portion falls outside your estate. This allows access to capital while still creating an inheritance tax advantage.
- Discounted Gift Trust
This provides an immediate discount on the amount subject to IHT, representing the actuarial value of the withdrawals you retain. It is useful where regular withdrawals are needed but long-term IHT reduction is still a goal.
Each of these trusts achieves broadly the same outcome, moving wealth efficiently out of the estate, but the mechanics and access differ.
Following a Clear Decision Workflow
To determine which trust is appropriate, we start with a structured set of questions:
- Do you want to fix the beneficiaries and their entitlements from the outset? If yes, we look at Bare Trusts.
- Do you want flexibility in who benefits and when? If so, we move toward a Discretionary Trust.
- Is an ongoing income or regular withdrawal required?
Depending on the answers, the route becomes clearer, from straightforward Bare Trusts for fixed beneficiary planning, through Discretionary, Gift and Loan, and Discounted Gift Trusts, up to more complex Asset Preservation Trusts for intergenerational legacy structures.
We use a workflow to ensure we are not guessing. It is a methodical process of elimination, with each yes or no moving us closer to the most appropriate trust.
Why Names Can Differ Between Providers
One of the reasons this can all feel slightly confusing is that different providers have used, and still use, slightly different terminology for trust and bond structures that serve similar planning purposes.
The important thing is not to get lost in the names, but to understand what the structure is designed to achieve, whether it is to move capital outside the estate, retain access, or control how and when beneficiaries receive value.
My role is to guide those we support through these distinctions clearly, so the most suitable trust and investment structure is chosen based on objectives, not terminology or insurance company jargon.
Onshore or Offshore?
Once we have identified the right trust, the next step is to decide whether the investment wrapper should be onshore or offshore.
An onshore bond tends to suit those who are UK based with little or no higher rate tax exposure. An offshore bond can offer greater deferral and flexibility for those with higher, variable or international tax positions.
I provide both. And once we have clarified the broader estate objectives, it is usually quite straightforward to make the call.
What Is Included in the Service
As part of a wealth management relationship, our work goes far beyond investment selection. Alongside your institutional-grade evidence-based portfolio, we will:
- Provide the trust deed
- Assist with completion, execution and witnessing
- Register the trust with the Trust Registration Service
We simultaneously handle the integration with an investment bond, or alternative investment wrapper. One client who has recently been through this process, Dr Stephen Downes, shared this:
Bringing It All Together
Once the trust and bond are live entities, the underlying funds are invested exactly as they would be in a pension or ISA. Our evidence-based investment philosophy remains the same, with our globally diversified, low-cost portfolio built for long-term compounding.
The only difference is that the structure protects the capital from tax erosion and secures it for generations to come.
It is not just what we invest in that matters. It is how and where investments are held.
If you would like to explore a trust and investment structure suited to your circumstances, we are always happy to have that conversation.
Contact us today or call 0345 200 4041 to arrange a free 20-minute consultation.
