Trusts
What is a trust?
A trust is a legal arrangement used to protect assets, such as land, buildings or money for the benefit of the “beneficiaries” to the trust. Such assets are referred to as “trust property”. When a trust is created “trustees” are appointed. The trustees are legally responsible for the assets held in the trust and are required to manage the trust and carry out the wishes of the person whose assets were placed into trust. The person whose assets were placed into trust is known as the “settlor”.
When are trusts commonly used?
In the case of high value estates trusts are commonly used as an attempt to mitigate the liability of a deceased’s estate to Inheritance Tax.
They are also commonly used when a beneficiary is not able to inherit the deceased’s estate straight away. A beneficiary may not be able to inherit the deceased’s estate straight away if, for example, they are too young or if it is the deceased’s wish that his or her estate only pass to such beneficiaries upon the death of his spouse, for instance.
Trusts are also commonly used where a beneficiary is unable to manage the assets themselves, for example, because they are infirm or where a testator wishes to keep the identity of a beneficiary secret.
How is a trust created?
A trust is normally created either in a will or in a separate legal document known as a “deed of trust” (sometimes called a “trust deed” or a “trust instrument”).
What types of trust are there?
There are a number of different types of trusts. Different types of trust have different tax liabilities and if, therefore, the purpose of creating a trust is to minimise your liability to pay tax professional advice should be taken.
There are the following types of trusts:
Bare trusts
A “bare trust” is the most straight-forward type of trust. For this reason it is sometimes called a “simple trust”. Under a bare trust the beneficiaries have the right to take income or assets from the trust whenever they want. Income Tax is payable on any income generated by the trust. Capital Gains Tax and Inheritance Tax may also be payable.
Interest in possession trusts
Where the beneficiaries under a trust are entitled to receive income as and when it is generated the trust is known, for tax purposes, as an “interest in possession trust”. Income Tax is payable on income generated by the trust usually at the rate of 20% or 10% depending on the source of the income. Capital Gains Tax and Inheritance Tax may also be payable.
Discretionary and accumulation trusts
A “discretionary trust” is a trust where the trustees have the discretion as to how they use the income generated by the trust property. Under an “accumulation trust” the trustees have the discretion to add the income to the capital. Income Tax is payable on income generated by the trust. The amount payable depends upon how much income is generated and where the income comes from. Capital Gains Tax and Inheritance Tax may also be payable.
Settlor-interested trusts
A “settlor-interested trust” is a trust from which both the settlor and his or her spouse or civil partner can both benefit. Income Tax is payable on any income generated by the trust. The rate of Income Tax payable will depend upon how the trust was set up. Capital Gains Tax and Inheritance Tax may also be payable.
Mixed trusts
As their name suggests “mixed trusts” comprise of more than one type of trust. Each type of trust is treated separately for tax purposes.
Parental trusts for children
Where a trust is set up by a parent of a child under the age of 18 and that child has never been married or in a civil partnership, the trust is treated, for tax purposes, as a “parental trust for children”. Income Tax is payable on any income of £100 or more generated by the trust. The rate of Income Tax payable depends on what sort of trust it is (A parental trust for children is not a type of trust in itself. The expression is simply used for tax purposes). Capital Gains Tax and Inheritance Tax may also be payable.
Non-resident trusts
Where some or all of the trustees of a trust are domicile in a country other than the UK or if the settlor wasn’t domicile in the UK when the trust was set up, for tax purposes, the trust will be treated as a “non-resident trust”. The tax rules for non-resident trusts are complicated and in most cases professional advice will need to be sought. Whether Income Tax is payable will depend on what sort of trust it is (A non-resident trust is not a type of trust in itself. The expression is simply used for tax purposes) and where the settlor and beneficiaries are domicile. Non-resident trustees can be liable to pay Capital Gains Tax and Inheritance Tax in certain circumstances.
Trusts for vulnerable people
A “Trust for a vulnerable person” is not a type of trust in itself. The expression is simply one which is used for tax purposes. If the beneficiary under a trust is under the age of 18 and one of their parents has died or if the beneficiary is physically or mentally disabled they are described as a “vulnerable beneficiary” for tax purposes. The consequence of this is that they may pay less Income Tax, Capital Gains Tax and Inheritance Tax than they would otherwise have to pay.
Heritage, charitable and business related trusts
Trusts are commonly set up by landlords and tenants to manage flats; by employers for the benefit of their employees; for the purpose of maintaining historic buildings and land; and to create investment trusts and unit trusts. There are special tax rules for each of these types of trust.