Interesting article on legitimately reducing an IHT liability with the use of trusts:
Clever use of trust structures enable the Grosvenor family - whose head is the Duke of Westminster - to pass assets down the generations without attracting inheritance tax, accountants say.
The Grosvenors' property fortune is estimated at £9bn. Yet the death of Gerald Cavendish Grosvenor, the sixth Duke of Westminster, and the inheritance of his title by his son Hugh, is not expected to trigger vast death duties.
This is because successive generations are "trustees" rather than direct owners of the assets, which include swathes of London's most prestigious streets and squares."The trustees are legal owners but not 'beneficial owners'," explained Hugi Clarke of estate planning firm Foresight. "As legal owners the trustees can do anything an ordinary owner can do, in terms of selling and trading the assets within the trust.
"But they do not have 'beneficial access' or absolute rights as individuals to the assets," Mr Clark said. In essence that means they can't claim the assets for themselves or sell them and keep the proceeds.
The assets are therefore not inside their individual estates for inheritance tax purposes.
According to the Grosvenor Estate's own description of its structure, the six trustees (of whom the late Duke was chairman) "hold the assets of the group for the benefit of current and future members of the Grosvenor family".
Income and other benefits can be paid out to beneficiaries, who may or may not include the trustees, and who will be taxed on them as normal.
Peter Legg, a chartered tax adviser and founder of IHT Planning Matters, said: "Here it would appear that shares in the businesses are owned by family members as trustees, not as individuals." This puts the assets at arms' length and effectively eludes death duties.
Mr Clark said: "The Duke and other family members are likely to be part of a 'beneficiary class'. That means they could receive income from the assets.
"But they do not have entitlements to either the income or the assets themselves."
Mr Clark speculated that, depending on how the trust was established, all six trustees might need to agree significant transactions.
If the Grosvenor family can use this strategy to avoid death duty, can anybody?
In theory, yes - though costs could be prohibitive.
"You need to have a seriously large estate to make such a structure feasible," said Mr Legg. "The costs of setting up a trust and the ongoing reporting costs can be onerous."
More significant though are recent tax changes, which have made these types of trust less attractive to those who want to establish them afresh.
For the past decade people who put assets into a "discretionary trust" - the form of trust most likely to be used here - must pay a tax of 20pc of the value of the assets going in.
Thereafter they must pay a "periodic charge" every 10 years, which is calculated as a fraction of the value of the trust at that point. This varies according to a formula, but typically falls between 2pc and 6pc.
What about the Duke's other assets - surely there will be inheritance tax there?
As with all families there are strategies that can be used to cut the bill. And the super-rich can buy the best advice on earth.
But death duties on directly owned assets (including properties, artworks and other investments) cannot be entirely avoided.
Above the "nil-rate band" - what every individual can leave free of death duties - the value of an estate is taxed at 40pc.
The nil-rate band is currently £325,000 per person, or £650,000 per couple. (It is being extended in a controversial new change to include a "family home allowance" of £175,000 per person.)
These thresholds are of negligible use where estates are measured in tens or hundreds of millions of pounds.
The Duke of Westminster is survived by his 57-year-old wife, Natalia. As with all married couples the surviving spouse can inherit assets free of inheritance tax without limit.
But if, as reported, the bulk of the Westminster estate goes to the late Duke's only son, Hugh, who is in his 20s, tax will be due on the late Duke's directly owned assets above the threshold.
What about giving assets away?
Yes, you can give anything to anyone and provided you survive seven years, the gift is free of tax.
The problem here is that older generations tend not to want to lose control of their wealth until the next generation is "ready".
Discretionary trusts can be used where parents or grandparents want to maintain control over assets while getting them outside their estate for inheritance tax purposes.
Beneficiaries and terms can be changed by the trustees.
The "settlors" (people giving the assets to the trust) need to survive seven years for those assets to move entirely out of their taxable estate.
"The point is that these trusts can ringfence assets from the great modern dangers of divorce or unsuitable marriages or profligacy," said Mr Legg.
"Absolute" or "bare" trusts are different in that no tax is payable when the assets go in. But they're not flexible. The beneficiary cannot be altered.