Trusts – Why Are They Useful In Estate Planning?Written on May 28, 2025 by Michael Powell
The usual reason for not gifting assets during our lifetime’s is that we are not sure about the effect on the beneficiary, or we would like to control the use of the asset or money.
An example situation to illustrate the use of trusts
The grandparents of a client had owned several properties consecutively in Cornwall over more than 50 years, buying a larger one each time their family increased in size. Many family members were regularly using the property and there were many family celebrations held there.
Some years after the first grandparent died, his surviving wife decided it was time to let someone else have the responsibility and passed the ownership of the family holiday home to my client, their granddaughter. Although some capital gains tax was due on the transfer of the property, it was relatively small compared to the potential inheritance tax liability on death. The intention being to survive the gift by 7 years.
Unfortunately, 11 years later the granddaughter went through a divorce and the family was left with no choice, but to see the holiday property sold to provide money so she could retain her own family home in Berkshire. Consequently, the whole wider family lost the use of the family home and it left her grandmother extremely disappointed, to say the least.
Had she placed the property into trust the grandmother could have chosen up to 3 more people (probably the granddaughter included) to act with her as trustees. They would have control of the property, and the family could continue to use it for holidays as before. It should fall out of assessment for inheritance tax on the grandmother after 7 years. Capital gains tax liability can be deferred.
Therefore, in the event of the granddaughter’s divorce the full value of the property may not be included in her assets, subject to legal advice. So, the trust could have prevented the loss of the property as well as reducing the inheritance tax liability.
Planning ahead is key with trusts
One very important point to be aware of in such planning. If her grandmother continued to use the property for regular holidays of her own (whether a gift was made to the granddaughter or to the trust) it could mean the current market value would be included in the grandmother’s estate at death. This would expose the estate to the same inheritance tax as before because the transaction is deemed a Gift with Reservation of Benefit (she did not really give the property away).
Fortunately, there are certain simple steps the grandmother and family can take to provide evidence that she is not retaining a benefit. These should be considered prior to making decisions. Professional advisers can recommend whether a trust is the best way to achieve your wish and arrange your affairs to avoid the Gift with Reservation of Benefit and explain whether deferral of capital gains tax is available or indeed appropriate.
Get it touch with Kirk Rice – experts in trusts
Tax and legislation are regularly changing so on-going advice may be needed. Most trusts must be reported to HMRC when established and annual tax assessments may be required.
I recommend that anyone considering the use of trusts takes professional advice before acting. Trusts are by their nature difficult to amend if set up in the wrong way. You get in touch with us via info@kirkrice.co.uk
Please note: answers are given for general guidance only and specific advice should be taken before acting on any of the suggestions made.
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