A trust is simply an arrangement where assets are held by one or more individuals or a trust company for the benefit of others.

Trusts can be established during your lifetime or on your death if included in your will.

While they are no longer primarily instruments for tax planning, they have a wide range of potential uses for the management and control of family assets. ETC has extensive experience advising on the creation, management and winding up of UK and offshore trusts.

Do you know?

The persons or company who have legal ownership of the trust assets are called trustees while those who can benefit from the trust are known as the beneficiaries. The individual who establishes the trust is known as the settlor.


Why would you set up a trust?

While you might think trusts are most commonly used for tax planning, you might in fact set up a trust for many reasons. For example:

  • You wish to make a gift of money but continue to exercise some discretion over how that money, or asset, is used and invested.
  • If due to illness or disability, you are unable to look after your own assets.
  • To ensure that any assets that you leave to your children are protected should your spouse remarry after your death.

In short, trusts are not primarily an instrument of tax planning but instead flexible vehicles for the management and control of assets.

They have distinct tax issues however and professional tax advice is essential when considering the establishment, ongoing management and winding up of a trust.


What are the main different types of trust?

There are many different types of trust.

The main distinctions are bare trusts, interest in possession trusts and discretionary trusts.

A bare trust is a simple agreement whereby one individual holds an asset as nominee for the other. In these cases, the income and capital belong to the beneficiary absolutely.

An interest in possession (or life interest) trust is one where the beneficiaries have an entitlement to the income of the assets held, or an entitlement to make use of them (e.g. to occupy a trust property rent-free), but they are not entitled to the trust capital absolutely.

Under a discretionary trust, beneficiaries have no fixed right to income or capital from the trust. Rather the trustees have discretion over who benefits, when, how and to what extent.

What are the tax implications of trusts?

Careful consideration is required for inheritance tax, capital gains tax and income tax when establishing a trust.

For most new trusts, where the value of assets entering the trust exceed the nil rate band (currently £325,000) then there will be an immediate 20% inheritance tax charge on the excess.

Death within seven years of the transfer would result in a further 20% being chargeable which would put your estate in the same position as an outright gift if you died within seven years. However, assets qualifying for reliefs such as business property relief can allow transfers in excess of the nil rate band intro a trust without an immediate tax charge. Such assets include shares in unlisted trading companies.

The transfer to a trust is a disposal for capital gains tax purposes. However, provided the settlor is excluded from benefitting from the trust, it is usually possible to defer the gain so that there is no immediate capital gains tax liability.

The distinction between interest in possession trusts and discretionary trusts is important for income tax purposes. The trustees of an interest in possession trust are subject to tax on trust income. The beneficiaries in turn are subject to tax on their share of their income from the trust, with a credit for tax paid by the trustees on that same income. The result is that non-taxpayer and basic rate taxpayer beneficiaries will have no further tax liability.

The tax position of discretionary trusts is more complex. The trustees are liable to income tax at the rate applicable to trusts, currently up to 45% depending on the nature of the income. It may however be possible to recover at least part of the income paid by the trustees. This is because income distributions are deemed to carry a 45% tax credit and where a beneficiary’s marginal rate of tax is less than this, they will be able to reclaim a refund of the tax credit.

Both types of trust are liable to capital gains tax, with the trustees having an annual exemption of up to half of that available to individuals.

What is an offshore trust?

An offshore trust is one where the trustees are resident outside the UK.

There is a slew of anti-avoidance measures relating to offshore trusts which mean that they have limited relevance to UK resident and domiciled individuals.

Offshore trusts remain important for non-UK domiciled and non-UK resident individuals.


Are there benefits of establishing an offshore trust?

Offshore trusts are unlikely to have benefits, and may have significant costs, for UK resident and domiciled individuals. However, offshore trusts retain tax advantages for non-UK domiciled and non-UK resident individuals.

In addition, alternatives offer by certain offshore jurisdictions such as foundations might also be relevant when looking at asset protection and tax efficient structures in the right circumstances.

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