Trust me, I’m a solicitor.
It’s a fairly standard conversation to be having with clients at the moment. They will ring me up and say that they have taken tax advice and they want to put things into trust to protect it from IHT.
You’d assume that my answer would be, that’s a great idea, my fees will be £xxxx and I’ll send the paperwork to you shortly.
What I actually say is, are you sure, and what type of trust, which no doubt comes as a surprise. Their reply is usually, “but my accountant told me to put it in to trust to avoid IHT, so that’s what I want to do”.
Yes, your accountant is absolutely correct. Done right, a trust will save you IHT, but, do you actually understand what a trust is, and what the risks and consequences are, and even that there are lots of different types of trusts.
Let me give you an example.
Some years ago, two clients of mine bought offices on a new development, to run their businesses from. The first one set up a separate company to buy the office, which the company rented it to the first company. The second client laughed at this idea, as they were going to buy their office in their pension (which is a type of trust) as this was much more tax efficient. As they had taken tax advice, and it’s not my place to give tax advice (for which all the accountants reading this are no doubt delighted as numbers are not my thing) I just smiled sweetly and got on with it.
Fast forward to last year when we had lockdown. Both clients were looking at how to reduce overheads to save their respective businesses. The first client could simply stop paying his rent, as his landlord whilst being a separate company, was owned and run by him, and so he’s not exactly going to evict himself. However, the second client, when approaching the trustees, did not fare so well. The Trustees have a duty to act in the best interests of the trust, and if that meant evicting a tenant that can’t pay, in favour of getting in a tenant that could pay, that’s what they’re going to do, even if that means that the beneficiaries other business goes bust. In this scenario it’s unlikely that the second client would have been evicted due to the protection that the government put in place, but he’s still not getting the same flexibility and support that my first client got.
Because once you put something in to trust, it no longer belongs to you. You can’t take it out again or have any control over it. It’s not yours and the Trustees must do what is best for the trust, which is not necessarily what is best for you, particularly if the beneficiaries of the trust are your children.
My example also illustrates the fact that there is more than one type of trust. There are also discretionary trust, will trusts, trusts in perpetuity and lots of others, all of which operate differently and have different aims.
That doesn’t mean that you shouldn’t put things into trust. It just means that it’s important that you fully understand the consequences of putting something in to trust, and that you have a clear idea of what kind of trust you want, or at least what you want out of your trust (other than tax saving) so that your solicitor can advise you on what kind of trust to go for. For example, if you’re putting a property in to trust, who has the right to live in that property during the course of the trust. Is it going to be rented out and if so, who gets the rent and who is responsible for maintaining the building. These are all things that can be dealt with, but may have an effect on what type of trust we would suggest.
So the best advice I can give is that if you are thinking about setting up a trust, ask your solicitor if you can talk to them about the pros and cons, and what’s involved, before you decide if it’s right for you.
Kleyman & Co Solicitors. The full service law firm. Trustworthy advice.