Trusts

What are trusts?

A trust is any arrangement where one or more individual or company (called the trustees) holds assets on behalf of other person(s) or company(s) (called the beneficiaries). It can be a simple trust, e.g. B holds a bank account on behalf of C, who is under 18; or it can be a complex situation, such as a pension trust.

There are different types of trusts depending on whether the trustees have the power to choose between beneficiaries (a discretionary trust), or whether beneficiaries have shares fixed from the outset (an interest in possession or relevant property trust).

Why are they useful?

Trusts can be helpful when beneficiaries are:

Under age
Financially vulnerable or untrustworthy
Disabled
In receipt of means-tested benefits
Likely to, or getting divorced
In debt, going or gone bankrupt
Unable or unwilling to manage money
Likely to enter, or already in, a care home
Untrustworthy
Only need the income from funds, not the funds themselves.

Trusts can also be useful in inheritance tax planning.

What is involved?

A trust can be set up in a person’s lifetime, or by Will. If by Will, the trust does not start to exist until the person making the Will dies.

If it is a lifetime trust, then the trust starts from when the paperwork is completed and the asset(s) transferred into the trust by the person setting up the trust (called the settlor).

There must be trustees who hold the asset. They can be the same people as the settlor, in which case no transfer of assets is required. If they are different people, the assets will need to be transferred to the trustees, for example shares by share transfer form, land by land registry transfer.

Trusts must be registered with HM Revenue & Customs and pay tax in their own right.

Can I set up a trust for myself?

Yes, but there are anti-avoidance provisions which may prevent it achieving what you wish. For example, if you set up a trust which either you or your spouse can benefit from, for inheritance tax purposes you will still be deemed to own the assets in the trust.

If you set up a trust over your house and then go into a care home, in some cases you will still be deemed to own the house when being assessed for your ability to pay care home fees. Legal advice should be taken as this is a complex area.

What about tax?

The taxation of trusts is complicated, and advice should always be taken. Different types of trust are taxed in different ways.

For inheritance tax, if you set up a trust and neither you nor your spouse can benefit from it, it qualifies as a gift from your assets. After seven years the assets of the trust will not be counted as yours when calculating any inheritance tax due on your death. However, if you die during that seven year period the trust assets will still count as yours for inheritance tax purposes.

For further advice, please contact a member of our team.