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Are trusts a “tax loophole” exploited by the wealthy?

The Times newspaper last week carried the headline “Duke of Westminster’s £8bn fortune escapes death duties”.

In the article, it was reported that on the face of the probate granted in respect of the late Duke’s Estate, personal wealth of £616 million was mostly left on life interest trusts for his widow Natalia.

Assets left to, or in trust for, a widow are inheritance tax free due to “Spouse Exemption” but HMRC will still claim its 40% tax when Natalia eventually dies.

In leaving his Estate in trust for his wife, the Duke is no different to the millions of other husbands in the UK. Whilst they may not be as wealthy, they have left their Estate to their wife, or in trust for her, for exactly the same practical, emotional and inheritance tax reasons.

The Times leads you to think that the rest of the Duke’s purported wealth of £8.3billion is held in family trusts and that such trusts allow wealthy families “to pass assets on outside the sphere of inheritance tax”.

However, it’s a common misconception that trusts stop any tax being payable. In fact, most trusts are created for reasons unconnected with tax – they serve the purpose to secure property where potential beneficiaries either can’t due to being minors, or can’t be trusted to have property vested in them outright.

So far as inheritance tax is concerned, assets held in trust may well be spared a charge to inheritance tax on the death of any beneficiary. But it is important to remember that there is a charge to inheritance tax at 6% on the value of assets in the trust every ten years.

A reasoning for the introduction of the “tenth anniversary charge” back in the 1970's was so that ultimately the total tax collected during the lifetime of the trust would equate to the one-off tax bill on the death of each successive head of the family.

The current Duke, Hugh Grosvenor, is currently 26. years old. So doing some rough calculations, with the likelihood of him living another 60 years, collecting 6% every 10 years as opposed to 40% on his death, doesn’t seem like a bad deal for HMRC. Equally, its not bad for the Duke and his family in terms of the ability to manage the tax liability over a number of years, at fixed points during the life of the trust (every 10 years), rather than being caught unawares by an untimely death and immediate liability to tax at 40%.

And the Grosvenor estate itself, quoted in the Times article, confirms that while the family trusts were designed “to maintain continuity of ownership”, it came at a cost of 6% every ten years.

To me this sounds like financial management, rather than the exploitation of any loophole.

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