What is a Trust?


Andy Wood

Andy is a practical, creative tax adviser who assists a variety of clients in achieving their personal and commercial objectives in the most tax efficient manner.

Background – What is a trust?

So, what is a trust? Getting your head around precisely what a trust is has sent many a person, including advisers, to the brink of insanity.

At its most basic, a trust is a separate legal entity – like, say, a company.

However, and with regret, it is perhaps there where the similarity ends.

This unfamiliar beast is supported by a perhaps baffling array of terminology and tax regimes. Further, there are different types of trust with, again, the same arcane terminology.

Things don’t become any easier if the tax is resident overseas. Here, we encounter a phalanx of anti-avoidance rules. Thankfully, this article is very much focused on UK based trusts.

What is a trust? – The cast of characters

A trust will almost certainly have the following key protagonists:

  • The Settlor or Settlors;
  • The Trustees; and
  • The beneficiaries

We shall deal with these in order.

The Settlor

The settlor is the person who created the trust and is transferring (settling) the initial assets on to trust. The Settlor is usually an individual but can, say, be a Company placing cash or assets on to trust for employees.

The Trustees

The trustees are the persons tasked with the responsibility for running the trust. This includes managing the assets of the trust (which might include buying and selling investments) and, of course, the payment of any tax liabilities.

The trust deed is the most important document for the Trustees. This, in addition to various legislative Acts, will confer the rights and obligations on the Trustee(s)

It should be noted that a professional Trustee will, these days, usually be a Company.


These are the lucky so and so’s who will potentially be able to benefit from the trust. There rights in relation to the trust property will very much depend on the type of trust and the trust deed itself.

Settlors are normally specifically excluded from benefiting from the trust assets. However, there might be cases where this is not the case.

If the settlor (or spouse) can still benefit from the trust this is referred to as a settlor interested trust which is taxed differently from a non-settlor interested trust while the settlor is still alive. The below assumes that the trust is not settlor interested.

Settlor interested trusts are discussed in a different article.

Trust income and capital

The concept of income and capital is very important in the world of trusts.

When considering the accounts of a trust the income and capital must be kept separate and expenses incurred by the trustees allocated against trust income or capital as appropriate. Capital normally consists of the initial endowment plus any growth in that capital whilst income is derived from the underlying capital assets.

Main types of trust – what is a trust?

The main ‘types’ of trust are as follows:

Bare trustThis is the simplest type of trust. It is basically a nominee arrangement.

The bare trustee holds the property on behalf of the beneficiary. During this time, the trustee acts in accordance with the beneficiary’s wishes.

This means that the trustee has no power of discretion and the beneficiary is absolutely entitled to the trust property

Interest in Possession (“IIP”) or Life Interest trustThe beneficiaries are absolutely entitled to the income of the trust as it arises. This income entitlement is to the net income – after income tax and the income expenses of the trust.

There will usually be a remainderman or two who will be entitled to the capital of the trust when the income beneficiaries are no longer entitled (for example on death)


Discretionary trustIn this type of trust the trustees hold powers of discretion. This allows them to determine:

·      whether any the beneficiaries should receive any distributions of income and capital,

·      If so, which beneficiaries should receive anything; and

·      the level of income and capital distributed.


Accumulation and Maintenance (“A&M”) trust

These used to be quite a popular type of trust established for children. They initially allowed the Trustees to operate as a discretionary trust until the child reached a certain age. At such time, they then provided for an IIP to the child or the trust was wound up.

Since Gordon Brown got his way in 22 March 2006, no new A&M trusts may be established.

Under the trust deed the terms of the trust will change for a beneficiary at a specified age at which he must become entitled to an IIP in his share of the trust capital or be entitled to the capital absolutely. These trusts are therefore treated and taxed as DTs until the beneficiary reaches the specified age at that point they are either wound up if the beneficiary becomes absolutely entitled to their share of the trust assets or continued as an IIP and taxed under the IIP rules accordingly.

Employer trusts

Employer trusts are trusts set up by an employer on behalf of his employees (and perhaps their families).

This type of trust can benefit from valuable IHT and CGT reliefs.

Of course, Employer Trusts carry certain baggage due to their past use for corporation tax and PAYE planning (often referred to as EBTs).

Taxation of trusts

We consider the tax position of trusts – income tax, capital gains tax and inheritance tax in separate articles.

If you have any queries around our article ‘what is a trust?’ then please do not hesitate to get in touch.

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