Advisers have been warned that failure to set up trusts correctly could land their clients - and themselves - in hot water.
Amid an increase in the number of advisers setting up trusts to protect client assets, the Asset Protection Strategy has warned intermediaries risk exposing clients to unnecessary and potentially punitive periodic and exit tax charges.
It said the tax charges arise when sizeable assets are placed in single trusts. Periodic charges can be up to 6% of the trust's value on the 10th anniversary where assets exceed the nil rate band, it added.
In addition, a maximum proportionate exit charge of 6% applies when capital is paid out from such a trust between 10 year anniversaries.
The Asset Protection Strategy added where the sum assured is of a certain size it should be placed in multiple 'unrelated' trusts- thereby avoiding the periodic and exit charges that can apply.
Whilst it said the problem of exposing clients to unnecessary charges is not "endemic", it cautioned some advisers may not be aware of the potential pitfalls and urged less experienced IFAs to be especially vigilant.
"As trusts are set up, in many cases by less experienced advisers, further down the line there could be a spate of unexpected tax liabilities, with ramifications for clients and advisers alike," said The Asset Protection Strategy commercial director Jeff Smith.
He added: "We are urging advisers to be on their toes and not to expose their clients to these unnecessary tax charges by placing sizeable assets in single trusts."
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