Trusts - the basics
There is a myth that you have to be super-rich to benefit from a trust arrangement, which is far from the truth. Put simply, trusts offer a means of holding and managing money or property for people who may not be ready or able to manage this for themselves. Used in conjunction with a Will, they can also help ensure that your assets are passed on in accordance with your wishes after you die. Here we take a look at the main types of UK family trust.
What is a trust?
A trust is an obligation binding a person called a ‘trustee’ to deal with property in a particular way for the benefit of one or more ‘beneficiaries’.
Settlor
The settlor creates the trust and puts property into it at the start, often adding more later. The settlor says in the trust deed how the trust’s property and income should be used.
Trustee
Trustees are the ‘legal owners’ of the trust property and must deal with it in the way set out in the trust deed. They also deal with the trust administration. There can be one or more trustees.
Beneficiary
This is anyone who benefits from the trust. The trust deed may name the beneficiaries individually or define a class of beneficiary, such as the settlor’s family.
Trust property
This is the property (or ‘capital’) that is put into the trust by the settlor. It can include:
- Land or property
- Shares
- Money
- Antiques or other valuable property
Examples of when a trust might be created
A trust might be created in various circumstances:
- When someone is too young to handle their affairs
- When someone can’t handle their affairs because they’re incapacitated
- To pass on money or property while you’re still alive
- Under the terms of a Will
- Where there's no Will
The main types of private UK trust
Bare trust
In a bare trust, the property is held in the trustee’s name – but the adult beneficiaries can take both the income and trust property whenever they want. You might, for example, use this type of trust to pass gifts to children while you’re still alive.
Interest in possession trust
With an interest in possession trust, the beneficiaries have a legal right to all the trust’s income (after tax and expenses), but not to the property.
You can, for example, set up an interest in possession trust in your Will. You might then leave the income from the trust property to your partner for life and the trust property itself to your children when your partner dies.
Discretionary trust
With a discretionary trust, the trustees decide how much income or capital, if any, to pay to each of the beneficiaries – but none has an automatic right to either. A discretionary trust is a way you can pass on property while you’re still alive and still keep some control over it through the terms of the trust deed.
Accumulation and maintenance trust
An accumulation and maintenance trust is used to provide money to look after child beneficiaries when they’re young. Any income that isn’t spent is added to the trust property, all of which later passes to the grandchildren. This type of trust could be used to fund the education of grandchildren.
In England and Wales the beneficiaries become entitled to the trust property between ages 18 and 25. At that point the trust turns into an ‘income in possession’ trust. In Scotland, the trust usually ends when the beneficiaries reach 16.
Mixed trust
A mixed trust may come about when one beneficiary of an accumulation and maintenance trust reaches 18 and others are still minors. Part of the trust then becomes an interest in possession trust.
Tax on UK trusts
Trusts, like limited companies, are taxed as entities in their own right. The beneficiaries pay tax separately on income they receive from a trust – at their usual tax rates, after allowances.
For more information please e-mail or contact us.
Levels and bases of, and reliefs from, taxation are subject to change. Because these investments may go down in value as well as up, you may not get back the full amount invested, especially if you withdraw from it in the early years.
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