A trust is a legal arrangement for managing assets. Trusts can come into creation as an ‘implied trust’ (generally not deliberately created and typically arising by operation of law) or as an ‘express trust’ (deliberately created) – in most instances, a trust will be an express trust.
In a trust, the person who provides the assets is called the settlor (or testator if created under a Will). The trustees are the people who hold and manage the trust assets, which they do for the benefit of the trust beneficiary/beneficiaries.
Types of Trust
There are many different types of trust. Trusts can also be classed under different labels for different purposes and have been adapted to achieve different aims. This can cause confusion and make the subject complicated. However, some of the most common types of trust are as follows:
Other trusts used for financial planning
Other types of trust that are commonly used in financial planning include:
Taxation of trusts
The tax incurred by a trust can be complicated and will differ depending on the type of trust used. However, a high-level overview of the main taxes is as follows:
Event |
What |
Type of Trust |
Rate of Tax |
Assets gifted to Trust |
Potentially Exempt Transfer (PET) |
Simple trusts (i.e. bare, absolute and fixed trusts), where the beneficiaries are set at outset |
1. Tax free if settlor survives 7 years. |
Chargeable Lifetime Transfer (CLT) |
Most other trusts, where the trustees have some discretion over beneficiaries |
1. Inheritance Tax (IHT) at half rate (20%) once nil rate band exceeded. |
|
Trust income Received |
Income Tax |
Simple trusts (i.e. bare, absolute and fixed trusts), where the beneficiaries are set at outset |
Taxed at beneficiary's marginal rate |
Interest in possession trusts |
Dividend-type income 8.75% |
||
Most other trusts, where the trustees have some discretion over beneficiaries |
1. Trust income up to £1,000* |
||
Capital Gain Realised |
Capital Gains Tax |
Simple trusts (i.e. bare, absolute and fixed trusts), where the beneficiaries are set at outset |
Taxed as beneficiary's capital gain. |
Where the beneficiary is vulnerable - a disabled person or a child whose parent has died |
Taxed as beneficiary's capital gain. |
||
Most other trusts, where the trustees have some discretion over beneficiaries |
1. Entitled to an Annual Exempt Amount (AEA) of half that allowed to individuals (£3,000 for 2023/24 and £1,500 for 2024/25 onwards). |
||
10 year anniversary |
10-yearly Inheritance Tax Charges |
Most trusts where the trustees have some discretion over beneficiaries |
Maximum of 6% on assets - complicated calculation required to determine amount of tax payable. HMRC will calculate on trustees behalf (via IHT100 form) |
When assets are transferred out of a trust or trust ends |
Inheritance Tax Exit Charges |
Most trusts where the trustees have some discretion over beneficiaries |
Maximum of 6% on assets - complicated calculation required to determine amount of tax payable. HMRC will calculate on trustees behalf (via IHT100 form) |
Comment
Trusts can be complicated, with various terms often used interchangeably. However, they provide a valuable way to protect assets and ensure financial stability for someone’s loved ones over time.
For a bespoke trust, assistance from a Solicitor will normally be required to draft the trust deed and rules. Alternatively, many providers do offer suitable draft trust deeds that can be used by advisers to set up trusts that clients can use for investing in their products.
Remember that since 1 September 2022, most express trusts will need to register on the Trust Registration Service (TRS). Furthermore, there is a legal requirement for evidence of registration to be provided before firms can enter into a business relationship with the trust.
Important Information
Please note this is for general information only and is based on LV=’s understanding of the relevant legislation and regulations and may be subject to change.
The tax treatment of benefits depends on individual circumstances, and may be subject to change in the future.
The use of this document is at your own risk, and the content should not be used for the provision of professional advice.
LV= accept no liability for any damages, losses or causes of action of any nature arising from your use of this document.