How to Avoid Inheritance Tax in the UK
Several ways exist to avoid inheritance tax in the United Kingdom. Perhaps the best way is to create a family trust. This is not particularly difficult to establish; nevertheless, this kind of trust requires a particular structure. A family trust allows its creator much more flexibility to distribute assets than other kinds of trusts; legally, however, it is the trustees who hold the final authority on distributions, not the creator of the trust (the settlor).
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Instructions
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Decide which assets you wish to place in the trust. You may contribute cash, real property and both tangible and intangible personal property. Many settlors choose to place only a small amount in the trust to start and gradually add assets as they get older. Nevertheless, you might want to consider a large initial contribution to hedge against your untimely death.
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Name the trustees. These are the people who determine how the trust assets will be distributed to the beneficiaries. Most jurisdictions will allow you to name yourself as a trustee as long as you also appoint an independent trustee --- someone outside your immediate and extended family. Failure to appoint an independent trustee will likely result in the courts setting aside the trust at some point.
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Name the trust beneficiaries. Family trust beneficiaries are limited to your immediate and extended family. Your beneficiaries will have no right to compel distributions. In fact, the trustees have broad authority in distributing the trust assets, as long as they fulfill their fiduciary duties, acting act reasonably and in the best interests of the trust beneficiaries. Requiring the unanimous consent of the trustees for any distributions will give you veto power over distributions.
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Have an experienced trust attorney draft the deed of trust. This document should name the initial assets of the trust as well as the settlor, trustees and beneficiaries; elucidate the authority and the duties of the trustees; set forth financial management regulations; establish the trustees' decision-making authority (i.e., whether unanimous consent is required for distributions); and set rules for investment of the trust assets. The trust deed should be signed and notarized.
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Sell your assets to your family trust over a period of years, and gradually forgive the trust's debts to you via signed and notarized documents.
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Lease assets from the trust and pay the trust a lease fee. For example, you could do this for your family home. This will allow you to maintain the right to use the property you contributed to the trust, while at the same time funding the trust.
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Tips & Warnings
Another way of avoiding inheritance tax in the UK is to make a lifetime gift. The amount is unlimited, and as long as you stay alive for seven years after making the gift, it will be free of inheritance tax when you die.
If you create a trust and transfer a substantial portion of your assets to it while in trouble with creditors, the courts may set aside the trust as a fraudulent transfer of assets.
