Helping you control and protect family assets

One of the most effective ways you can manage your estate planning is through setting up a trust. The structures into which you can transfer your assets can have lasting consequences for you and your family and it is crucial that you choose the right ones. The right structures can protect assets and give your family lasting benefits.

 

A trust is a legal arrangement where one or more trustees are made legally responsible for assets. The assets – such as land, money, buildings, shares or even antiques – are placed in trust for the benefit of one or more beneficiaries.

The trustees are responsible for managing the trust and carrying out the wishes of the person who has put the assets into trust (the settlor). The settlor's wishes for the trust are usually written in their will or given in a legal document called the trust deed.

The purpose of a trust

Trusts may be set up for a number of reasons, for example:

  • to control and protect family assets
  • when someone is too young to handle their affairs
  • when someone can't handle their affairs because they are incapacitated
  • to pass on money or property while you are still alive
  • to pass on money or assets when you die under the terms of your will – known as a will trust
  • under the rules of inheritance that apply when someone dies without leaving a valid will (England and Wales only)

There are several types of UK family trusts and each type of trust may be taxed differently. There are other types of non-family trusts. These are set up for many reasons – for example, to operate as a charity, or to provide a means for employers to create a pension scheme for their staff.

What is trust property?

A trust property is a phrase often used for the assets held in a trust. It can include:

  • money
  • investments
  • land or buildings
  • other assets, such as paintings, furniture or jewellery – sometimes referred to as chattels

The cash and investments held in a trust are also called the trust capital or fund. This capital or fund may produce income, such as interest on savings or dividends on shares. The land and buildings may produce rental income. Assets may also be sold producing gains for the trust. The way income is taxed depends on the type of income and the type of trust.

What is a settlor?

A settlor is a person who has put assets into the trust. This is known as settling property. Assets are normally put into the trust when itís created, but they can also be added at a later date. The settlor decides how the assets in the trust and any income received from it should be used. This is usually set out in the trust deed.

In some trusts, the settlor can also benefit from the assets they've put in. These types of trust are known as settlor-interested trusts and they have their own tax rules.

The role of the trustees

Trustees are the legal owners of the assets held in a trust. Their role is to:

deal with trust assets in line with the trust deed

manage the trust on a day-to-day basis and pay any tax due on the income or chargeable gains of the trust

decide how to invest the trust's assets and/or how the assets in the trust are to be used – although this must always be in line with the trust deed

The trust can continue even though the trustees might change. However, there must be at least one trustee. Often there will be a minimum of two trustees: one trustee may be a professional familiar with trusts – a lawyer, for example – while the other may be a family member or relative.

What is a beneficiary?

A beneficiary is anyone who benefits from the assets held in the trust. There can be one or more beneficiaries, such as a whole family or a defined group of people, and each may benefit from the trust in a different way.

For example, a beneficiary may benefit from:

  • the income only – for example, they might get income from letting a house or flat held in a trust
  • the capital only – for example, they might get shares held on trust when they reach a certain age
  • both the income and capital of the trust - for example, they might be entitled to the trust income and have a discretionary interest in trust capital
  • If you're a beneficiary you may have extra tax to pay or be entitled to claim some back depending on your overall income.
  • Trust law in Scotland

The treatment of trusts for tax purposes is the same throughout the United Kingdom. However, Scottish law on trusts and the terms used in relation to trusts in Scotland are different from the laws of England and Wales, as well as Northern Ireland.

When you might have to pay Inheritance Tax on your trust

There are four main situations when Inheritance Tax may be due on trusts:

  • when assets are transferred – or settled – into a trust
  • when a trust reaches a ten-year anniversary of when it was set up
  • when assets are transferred out of a trust or the trust comes to an end
  • when someone dies and a trust is involved when sorting out their estate

The right type of trust

Ensure you don't more tax than is necessary

There are now three main types of trusts.

Bare (Absolute) trusts

With a bare trust you name the beneficiaries at outset and these can't be changed. The assets, both income and capital, are immediately owned and can be taken by the beneficiary at age 18 (16 in Scotland).

Interest in possession trusts

With this type of trust, the beneficiaries have a right to all the income from the trust, but not necessarily the capital. Sometimes, a different beneficiary will get the capital say on the death of the income beneficiary. They're often set up under the terms of a will to allow a spouse to benefit from the income during their lifetime but with the capital being owned by their children. The capital is distributed on the remaining parent's death.

Discretionary trusts

Here the trustees decide what happens to the income and capital throughout the lifetime of the trust and how it is paid out. There is usually a wide range of beneficiaries, but no specific beneficiary has the right to income from the trust.

Some trusts will now have to pay an Inheritance Tax charge when they are set up, at 10 yearly intervals and even when assets are distributed. The right type of trust in conjunction with your overall financial planning could help minimise the amount of Inheritance Tax payable. This is a highly complex area and you should obtain professional advice to ensure the right type of trust is set up for your particular circumstances.