Could a Legacy Preservation Trust help minimise your IHT bill?

We all want to leave the best legacy we can to those we love.

There are some easy steps you can take during your lifetime to protect your estate from Inheritance Tax liability. 

At a glance

• Families paid £5.7 billion in Inheritance Tax (IHT) from April to November 2024, up £0.6 billion on the previous tax year.¹
• Reducing the value of your estate during your lifetime will mean that your family will owe less IHT in the future.
• Many people know that they can gift money to reduce their IHT liability, but not everyone knows how Trusts, and Legacy Preservation Trusts can help create a tax-efficient inheritance plan. 

Families paid £5.7 billion in Inheritance Tax (IHT) from April to November 2024, up £0.6 billion on the previous tax year.¹

Reducing the value of your estate during your lifetime will mean that your family will owe less IHT in the future.

Many people know that they can gift money to reduce their IHT liability, but not everyone knows how Trusts, and Legacy Preservation Trusts can help create a tax-efficient inheritance plan.

Receiving an inheritance can be life changing. An inherited lump sum can be used to send children or grandchildren to great schools or help them see the world on their gap year. They can mean a mortgage can be paid off early, or a new business launched.

So, not surprisingly, leaving a good legacy is high on most people’s financial wish lists. More than two thirds of our clients (69%) told us they’re hoping to leave money or assets to their children when the time comes.² And our recent Real Life Advice Report revealed that almost 1 in 5 (19%) of those who have a financial adviser said that advice had reassured them they’d be able to leave a good legacy for their family.³

How much IHT might my family pay?

Currently, IHT is usually charged at a rate of 40% on the portion of the estate over a £325,000 threshold, or up to £500,000 if the estate includes a family home worth at least £175,000 which is passed on to children, grandchildren or another direct lineal descendant. Our IHT calculator can help you work out how much IHT you might currently pay on your estate.

Most of us know that we can reduce the value of our estate by gifting money during our lifetime – it’s one of the most straightforward elements inheritance planning.

Fewer people are aware that Trusts can also help you limit the size of your overall estate.

Should I put money, property or other assets in Trust?

Trusts are a tried and tested method of passing money from one generation to another, since they can protect an asset from IHT. Once you ‘gift’ an asset by putting it in Trust for a beneficiary, it’s no longer yours. Generally speaking, provided you survive at least seven years from setting up the Trust, the gifted amount no longer forms part of your estate – and therefore doesn’t attract IHT.

How do Trusts work?

A Trust is not unlike a ‘treasure chest’ that can hold any valuable asset such as money, land, high value items or property for safekeeping, and nominate trusted individuals – known as Trustees – to hold the keys.

You appoint preferably two or more Trustees and leave a clear letter of wishes to guide them on how and when to distribute funds, and what for.

It is, however, important to understand that, although Legacy Preservation Trusts (LPTs) can mitigate an IHT bill, your beneficiaries may become liable for CGT or Income Tax when they draw income from or sell the asset. So, you may avoid one tax but be liable for another. At present, rates of CGT are still below IHT at 40%, but tax regulations can change, as we saw in the recent Budget.

Can a Legacy Preservation Trust help me avoid IHT?

A LPT does exactly what it says on the tin – it preserves your legacy for the longer-term, so money can pass tax-efficiently through several generations of your family.

LPTs aren’t just for the very wealthy. They’re equally useful for anyone likely to have a medium-sized estate too.

An SJP Legacy Preservation Trust is designed to hold assets such as death-in-service benefits so that your beneficiaries can access the money if they need to. But the money itself sits outside your estate, protected from IHT. Like other Trusts, you’ll need to choose two Trustees to be responsible for the distribution of your money after you have died. You also need to inform your employer of your arrangements with an ‘expression of wishes’ form from your pension provider – your HR department should be able to help.

This ensures that the money is paid into the LPT, rather than to an individual beneficiary, when the time comes.

Your letter of wishes controls your legacy

With an LPT, the distribution of the money is controlled by your chosen trustees. They can make decisions based on the instructions you leave behind in a letter of wishes – it is vital therefore to choose the right people to act as your trustees.

We recommend that you review your letter of wishes whenever there’s a big family event and update it if necessary. Any time there’s a change within the family such as marriage, divorce, or a new grandchild, it’s a good opportunity to revise the letter, and make sure that your wishes are clearly set out to help your trustees make the right decisions.

Setting up a St. James’s Place LPT

Trusts and legacy planning can seem complex, but they are both versatile and tax efficient. We do recommend that you always take financial advice when you’re starting to think about inheritance and legacy planning, especially if you think you might want to set up a Trust or an LPT.

LPTs are an exclusive SJP product created to protect a death-in-service lump sum. Any of our Partners will be happy to help you through the setting up process or explain it in more detail.

As a form of discretionary Trust, an LTP may be subject to certain tax charges – but these can often be offset by the benefits.

We can also advise you if the Trust becomes unnecessary – for example, when you have retired and death-in-service benefits are no longer relevant, or if your tax position changes.

If you’d like more information on planning inheritance tax, or if you want to see how a St. James’s Place LPT can save your family tax just get in touch.

The Legacy Preservation Trust is an advised SJP product, available through a St. James’s Place Partner.

The levels and bases of taxation, and reliefs from taxation, can change at any time and are generally dependent on individual circumstances.

Trusts are not regulated by the Financial Conduct Authority.

Sources
¹HMRC, 21 November 2023 
²1Intergenerational Wealth Transfer Survey, SJP and The Wisdom Council, 2023, survey size 887.
³The Real Life Advice Report was commissioned by St. James’s Place. Opinium surveyed just under 12,000 UK adults nationwide in two polls between May and August 2024. Quotas and post-weighting were applied to the sample to make the dataset representative of the UK adult  population. Quantative data referenced is sourced from the first poll which had a total sample of 7,995 respondents. Survey included those aged 18-34 (1,940), aged 35-54 (2,654) & aged 55 and over (3,401).

SJP Approved 20/01/2025