Birmingham Post Business Growth Monitor - January 2012

By Lucas Markou, partner at accountants and business advisors Jerroms LLP.

Discretionary trusts can be a very tax-effective means of ensuring on-going asset protection, where they are set up to hold shares in privately-owned businesses or partnership interests.

Though there is a possibility that a court might seek to look through a trust in pursuit of a marital settlement, there is no doubt that the retention of assets in a trust place significant obstacles in its way. Asset protection motivates the creation of many trusts.

The tax advantage in this situation will arise from business property relief (BPR) which gives full relief from inheritance tax (IHT) for many trading businesses which have been owned for two years and which fulfil other criteria. Assets qualifying for BPR can be transferred into a lifetime trust or left in trust by will.

If such eligible assets are transferred to a lifetime trust while BPR is available and subsequently sold, the cash can be retained in the trust for stated beneficiaries even though BPR is no longer available.

After sale, the cash could then only be passed to the discretionary trust in IHT free manner with careful planning and giving an amount equal to the IHT 'nil rate band' every seven years.

On death, leaving business assets in trust rather than outright to a surviving spouse protects again against the possible loss of BPR if the shares are sold. It also opens the door for more sophisticated post-death planning known as 'double dipping'.

If a trust is used, funds can be advanced from the trust for beneficiaries, for example, for the education of children or grandchildren, and the funds are available for a wide range of purposes. In the case of a will trust, the surviving spouse can be a beneficiary. Trustees will take letters of wishes into account.

At the same time, by comparison to outright gifs, the trust will offer a significant degree of protection in the event of children divorcing.

Trusts and BPR are both complex and professional advice should always be sought.