A Guide To Trusts

A Bare Trust is the simplest form of trust.

In this type of arrangement:

• The beneficiary has an immediate and absolute right to both the capital and income of the trust.
• Trustees simply hold the assets on behalf of the beneficiary.
• Beneficiaries are usually taxed as though they own the assets personally.

Bare trusts are often used:

• To hold assets for minor beneficiaries
• As Personal Injury Trusts

A Life Interest Trust gives one beneficiary (the Life Tenant) the right to receive income from the trust for their lifetime or until a specified event occurs.

Once the life interest ends, the trust assets pass to other named beneficiaries.

These trusts are commonly used:

• In Wills, particularly in second marriage situations
• To provide income for a surviving spouse while protecting assets for children
• As part of protective or care planning arrangements

Trust deeds can also allow trustees to distribute capital during the life tenant’s lifetime if necessary.

Taxation of Life Interest Trusts

Income Tax
Income is usually taxed on the Life Tenant.

Inheritance Tax
Most lifetime Life Interest Trusts fall under the relevant property regime, meaning:

• A 20% inheritance tax charge may apply on transfers above the available nil rate band.
• There may be ten-year anniversary charges.
• There may also be exit charges when assets leave the trust.

An important exception is an Immediate Post Death Interest Trust (IPDI) created by Will. In this case:

• The trust assets form part of the Life Tenant’s estate for inheritance tax purposes.
• There are no ten-year or exit charges.

Capital Gains Tax

• Holdover relief may be available on transfers into trust.
• Trustees receive half the annual capital gains exemption available to individuals.
• Gains are generally taxed at 20% or 28% for residential property.

A Discretionary Trust gives trustees flexibility in deciding how and when trust assets are distributed.

The trust deed names a group of potential beneficiaries, but trustees decide:

• Who benefits
• When they benefit
• How much they receive

A Letter of Wishes is often prepared by the settlor to guide trustees, although it is not legally binding.

Discretionary trusts are often used where beneficiaries may be:

• Vulnerable or disabled
• Experiencing financial difficulties
• At risk of bankruptcy
• Too young or inexperienced to manage funds directly

Taxation of Discretionary Trusts

Inheritance Tax

Discretionary trusts fall within the relevant property regime, which may include:

• Ten-year anniversary charges
• Exit charges when assets are distributed

Income Tax

Trustees have a £1,000 standard rate band taxed at lower rates. Income above this threshold is taxed at higher trust rates.

Capital Gains Tax

• Holdover relief may be available on transfers into the trust
• Trustees receive half the individual capital gains exemption
• Gains are typically taxed at 20% or 28% for residential property

Certain trusts benefit from special tax treatment, although they still fall within the categories above.

Bereaved Minor Trusts

• Must be created by a parent for their child.
• The child must become absolutely entitled to the assets at age 18.
• These trusts benefit from favourable inheritance tax treatment.

18–25 Trusts

• Also created by a parent for a child.
• The beneficiary becomes entitled to the assets between ages 18 and 25.
• The tax treatment varies depending on the beneficiary’s age.

Disabled Person’s Trusts

These trusts are designed to benefit a disabled person.

For inheritance tax purposes, the trust assets are often treated as belonging to the disabled beneficiary.

A trust is a legal arrangement where assets are held by trustees for the benefit of chosen beneficiaries.

Trusts can be used for a variety of reasons, including:

• Protecting family assets
• Managing wealth for future generations
• Providing for vulnerable beneficiaries
• Planning inheritance and tax arrangements

Trustees can be family members, friends or professional advisers. Some individuals choose to appoint professional trustees, such as solicitors from Wilson Browne Solicitors, to provide experience and independence.

In some circumstances, trustees may be able to terminate a trust or distribute the assets. However, the options available depend on the terms of the trust and legal advice should be sought.

After the settlor’s death, the trustees continue to manage the trust and eventually distribute the assets to the beneficiaries according to the terms of the trust.

Trusteeship is a personal role. If a trustee loses mental capacity, they may need to be replaced.

Replacement may be possible under the Trustee Act 1925, although in some circumstances an application to the Court of Protection may be required.

Legal advice should be obtained if this situation arises.