If you are considering establishing a trust, it is important to understand some of the basics about how they operate and the role of a Trustee.
This article aims to give a brief overview and we would always recommend seeking professional advice before taking any action.
A trust is a separate entity operated by a small group of people (at least two or three), known as the ‘Trustees’. The Trustees are the legal owners of whatever assets are transferred to them by the person giving them away, the ‘Settlor’. The Trustees are normally individuals, but can include a professional Trustee or Trust Company.
The Trustees are required to look after those assets on behalf of those who will benefit from the Trust, the ‘beneficiaries’.
The details of who the Trustees, Settlor, Beneficiaries are and assets being placed into Trust are normally set out in the ‘Trust Deed’, along with the ‘terms’ of the trust, i.e. how the Trust will operate.
There are a broad range of Trusts, however the two main types are ‘Discretionary’ and ‘Interest in Possession’.
Broadly, in a Discretionary Trust, the Trustees have the power to distribute income and/or capital to the beneficiaries at their discretion i.e. they have absolute control.
In an Income in Possession Trust, the beneficiary, known as the ‘Life Tenant’ of the Trust, is entitled to all of the income arising in the Trust. The Capital of the Trust i.e. the assets, are normally reserved for another beneficiary(ies), the ‘remaindermen’. This type of trust is commonly used where a spouse passes away and under the terms of their Will, assets pass into a Life Interest Trust for the surviving spouse, to provide for them in their lifetime, with the assets then passing to their children upon the surviving spouse’s death.
People establish Trusts for a variety of reasons, depending on their goals. Some benefits include;
A trust can be established during the lifetime of the Settlor, or upon death, through their Will.
In both circumstances, a suitably experienced solicitor will be required to draft the Trust Deed, or Will, to ensure that it is suitably worded and the assets correctly transferred into the Trust.
Trustees have a legal responsibility to carry out certain duties as part of their role. These include, but are not limited to;
Gifting assets into Trust means that the income is no longer that of the Settlor.
If income producing assets are settled into Trust, or the Trust makes distributions of income to Beneficiaries, the Trustees may need to complete a Self-Assessment tax return.
The type of trust determines the Income Tax rate.
Settling assets into Trust during lifetime is normally a chargeable disposal by the Settlor, for Capital Gains Tax purposes.
Depending on the type of Trust, there are some Capital Gains Tax reliefs for the Settlor, when gifting assets into Trust.
Trustees are also required to report chargeable disposals on a Self-Assessment tax return. This can include not only the sale of assets, but also distributions of assets to beneficiaries in certain circumstances.
Settling assets into Trust is normally a ‘Chargeable Lifetime Transfer’ for Inheritance Tax purposes and may result in a tax charge.
Depending on the type of trust, there may also be an Inheritance Tax charge on the distribution of assets from a trust, and on the value held in the trust on the tenth anniversary of its establishment and every ten years thereafter.
Most trusts are now required to register for HMRCs ‘Trust Registration Service’, even if they are already in Self-Assessment. A certain level of information needs to be provided to HMRC, including Trustee, Beneficiary and Settlor details, and information about what assets were originally settled into Trust.
The taxation of non-UK resident trusts is complex and is not covered in the basic details set out in this article.
If you require advice concerning the residency of a Trust and the subsequent tax consequences, specialist advice should be sought.
While Trusts are not as popular as they once were, they still present a useful tool for tax planning and the safeguarding of assets.
We find that the majority of issues tend to arise where Trusts are established without a full understanding of the implications, or how the Trust should operate. Suitable professional advice should always be sought before deciding to establish a Trust and potentially on an ongoing basis, as to how the Trust should be administered.
Emma Robinson works within our private client tax team and has a background of providing bespoke tax advice for high net worth individuals and internationally mobile clients. With experience in complex tax returns, inheritance tax and trusts, she helps to ensure that we provide an all round service to clients – you can contact Emma or the team on 01242 776000 or email firstname.lastname@example.org.
Watch Emma’s short video for more information about tax implications for Trusts: