Trust planning
Trusts are a way of managing wealth – money, investments, land or property – for you, your family, or anyone else who you’d like to benefit.
When you put money or property in a trust, provided certain conditions are met, you no longer own it. This means it might not count towards your Inheritance Tax bill when you die. Find out the ins and outs of using a trust to cut your Inheritance Tax.
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What is a trust?
In a trust, you transfer cash, property, or investments to another person to hold and manage for the benefit of a third party. For instance, you may establish a trust to safeguard some of your savings for your children.
It’s crucial to comprehend two crucial roles in any trust:
- Trustee – the individual who possesses the assets in the trust. They have the same authority as someone who purchases, sells, and invests in their property. The trustee’s duty is to administer the trust and handle the trust property responsibly.
- Beneficiary – the person for whom the trust is established. The assets retained in the trust are held for the beneficiary’s advantage.
What does a trust do?
When certain conditions are met, transferring assets into a trust means they are no longer considered yours. As a result, their value is typically not included in calculating your Inheritance Tax liability upon your passing.
The assets, such as cash, property, or investments, instead belong to the trust, meaning they are outside of your estate for tax purposes.
Another potential benefit of a trust is that it allows for asset protection and control for the beneficiaries, mainly if they are young or vulnerable.
The trustees are legally responsible for managing and protecting the trust assets on behalf of the ultimate beneficiary.
When creating a trust, you can establish rules for its management, such as stipulating that the beneficiaries may only access the trust when they reach a certain age, such as 25.
What types of trust are there?
There are various types of trusts with different costs and complexities involved in their setup.
Basic trusts may have minimal costs, whereas more intricate ones might require specialised advice, resulting in higher expenses.
Certain trusts have their own Inheritance Tax system, meaning that after transferring assets to them, they are no longer subject to Inheritance Tax upon your demise.
However, some trusts may incur higher income and capital gains taxes, making it crucial to understand their type.
The type of trust you opt for depends on your objectives. Below are some of the most prevalent options:
- A bare trust is the most straightforward type of trust where the beneficiary receives all the assets in the trust when they turn 18 (16 in Scotland), provided they’re mentally capable.
- An interest in possession trust allows the beneficiary to immediately receive income from the trust, but not the assets generating that income. The beneficiary will need to pay income tax on the income received. This trust is commonly used when a person remarries after divorce but wants their investments to go to their children from the first marriage.
- A discretionary trust gives the trustees absolute discretion to decide how the trust’s assets are distributed to the named beneficiaries. For instance, grandparents may set up this trust for their grandchildren and allow the trustees, who could be the grandchildren’s parents, to decide how the income and capital should be divided.
- An accumulation trust enables the trustees to accumulate income within the trust and add it to the trust’s capital. They may also pay income out, similar to discretionary trusts.
- A mixed trust combines features from different types of trusts. For example, half of the trust fund might be held under an interest in possession trust, while the remaining half is held under a discretionary trust.
- Trust for a vulnerable person is a type of trust that provides special tax treatment for disabled people or children. If a vulnerable person, such as a person with disabilities or an orphaned child, is the sole beneficiary of the trust, there is generally less tax to pay on the trust’s income and profits.
- A non-resident trust is a trust where all the trustees are outside the UK. Such a trust may attract little or no tax or reduced tax on the trust’s income.
Choose your trustees
When setting up a trust, it’s important to carefully consider who will serve as your trustees.
- Typically, people choose family members or close friends who they trust and who are willing to take on the responsibility.
- Having at least two trustees is recommended, but generally, no more than three or four.
- Alternatively, you could appoint a company, such as a bank or a solicitor firm, as your trustee, although they will typically charge for their services. While many people choose to name the executor of their will as the trustee of the trust, this is not a requirement.
How can we help
Setting up a trust can involve complex legal issues, and there is a risk of triggering an immediate tax liability if not done properly.
To avoid costly mistakes, seeking professional guidance before creating a trust is essential. It is recommended to consult with one of our qualified financial advisers.
