Putting your assets in trust

There are several trusts to choose from and most individuals use them to retain control of the management of assets that have been given away, protect family assets from divorce and to retain an income.

Discretionary Trust: A straight transfer of capital into this trust up to the value of nil rate band will provide an IHT-free fund once seven years have passed and the settler (the person/s making the gift) can retain control of the assets. The trust fund can only be for the beneficiaries and they cannot pay themselves income. There may be exit and periodic charges.

Loan Trust: Instead of gifting funds to trustees, the settler lends a capital sum to be invested. The loan, normally interest free, is repayable at any time and can be taken as a regular payment to the settler. There is a flexibility for the settler in whether or not to take the regular withdrawals as repayment of the loan, but as a method of saving IHT it is dependent on the growth of the fund because the loan will always form part of the estate.

Discounted Gift Trust: This provides the settler with the ability to pass capital into a trust and retain an income from that for life. This type is popular as people like the appeal of a fund that is free from IHT (after seven years) and can still pay an income. However, the income is set in stone and cannot be switched off until death and has no ability to rise in line with inflation. Capital value can be affected by income being withdrawn when it may not be required.

Flexible Reversionary Trust: This offers the most flexibility in the current economic environment. The IHT benefit is available on a basic seven-year gift rule up to the value of a nil rate band. The settler has the option of taking income if and when they want it. They can also gift funds out to the beneficiaries at any time.

• David Rankin is senior financial planning director at Rensburg Sheppards Investment Management in Edinburgh