Is a Trust right for you?

Assets held in an individual’s estate will form part of the Inheritance Tax Estate (IHT) and may be subject to IHT depending on the available rate bands and reliefs.

Therefore, there may be occasions when an asset is held and it would be preferable for tax to give it away sooner rather than later. What if you are not comfortable with who will hold the asset, who will potentially have access to the asset or who is managing it? A trust can be a useful option for ensuring control over a particular asset.

What are the main reasons trusts are used?

  • To protect assets – Placing assets in certain types of trusts can protect them from creditors, marriage breakdowns or from those who might influence beneficiaries
  • Minimising tax – Assets put into a trust no longer form part of the transferor’s estate and won’t be subject to Inheritance Tax (IHT) on the transferor’s death estate
  • Managing assets – A trust can be used if a person does not have the capability or desire to manage assets
  • To guarantee succession of property

Who is involved?

  • A settlor is the person who creates the trust
  • A trustee is the person(s) who has the control over the assets and trust
  • The beneficiaries are people or organisations who can benefit from the trust

What are the types of trusts?

  • Discretionary trust – this is a common trust used to hold assets where the trustees have wide discretionary powers to decide when the beneficiaries can benefit from the trust assets. For example, if a rental property is held in the trust the trustees can choose to pay the rental profits to a beneficiary if they so wish, but are not obliged to
  • Interest in possession trust – Beneficiaries are entitled to net income from the trust as it arises therefore, if the trust holds a rental property the rental profits are automatically paid to the beneficiaries per the trust deeds
  • Protective trust – similar to an interest in possession trust but the asset is protected from being disposed of by the beneficiary. Using the example of a trust which holds a rental property, this trust would mean that the beneficiary has a right to the net income but the trust would come to an end if the beneficiary was made bankrupt or attempted to sell the property.
  • Bare trust – the assets are essentially held on behalf of the beneficiary and the trustees act in accordance with the beneficiaries wishes

What is involved in creating a trust?

A trust is a legal relationship and will therefore require legal involvement. It will usually detail the trustee, beneficiaries and the terms of the trust created.

What are the tax consequences of creating a trust?

Creating a discretionary trust and putting an asset in to it is a chargeable transfer for IHT, meaning IHT may be due depending on rate bands and allowances available. E.g. a settlor transfers a property worth £500,000 into a discretionary trust and does not have any allowances or rate bands to offset, the £500,000 value will be subject to IHT at 20%. Transferring an asset into a trust is also a disposal for Capital Gains Tax purposes but in some cases a claim can be made to holdover the gain to the transferee.

What is the admin for the trust?

In most cases the trust will have to register with HMRC using the Trust Registration Service and file annual tax returns. IHT may also be due when a ten year anniversary of the trust being created occurs or when assets are transferred out of the trust, depending on the assets involved, so additional calculations and paperwork will be needed.

How can we help?

As with most taxes, advice should be sought to discuss what your needs are and if a trust is the best option for you. We can discuss your current assets, your potential IHT on your estate, reliefs available and what you would like to achieve by giving assets away and succession.

IHT can be complex with many relief and rate bands to consider; advice for one individual will not be the same as advice for another so it is best to seek professional advice.

For further advice, please contact us at advice@taitwalker.co.uk.