Trusts have been used for centuries and are an effective ways of saving or mitigating tax both during your lifetime and on your death, says Tom Moore, Tax Manager at Bulley Davey
Many people consider trusts too complex to be worthwhile. But in a lot of cases they can be a simple legal document that splits up an individual’s assets and can safeguard them for future generations. Put simply, a trust is the formal transfer of assets (such as property, shares or cash) from an individual, known as the settlor, to a small group of people called trustees, or to a trust company, with instructions that they hold the assets for the benefit of others, known as beneficiaries. This transfer can take place both during your lifetime and on your death. There are many reasons people decide to make a trust but usually it is to preserve and manage their assets for the benefit of their children, grandchildren and wider family, friends and even charities for generations to come. For example, a parent or grandparent may worry that inheriting assets too young may harm the beneficiaries of their will, so they decide to create a trust to safeguard those assets until an age where they are deemed wise enough to manage them.
TYPES OF TRUST
There are several types of trust – which is Bulley Davey comes in, to guide people towards the right trust for them. The main types are: • Discretionary trust: Benefits are allocated at the trustees’ discretion to any one or more of several beneficiaries. The trustees might even decide, for a time, to benefit no one; with the income being accumulated for future use. • Interest-in-possession trust: This is where the income or benefit must be given to the specific beneficiary. There may be more than one beneficiary but they will all have a fixed entitlement. It can be set up to give one beneficiary the income from the trust assets during their lifetime before those assets pass to another beneficiary. • Vulnerable beneficiaries trust: This is a trust for the benefit of disabled or bereaved minors. Although these can be discretionary or interest-in-possession trusts, during the lifetime of the beneficiary, special tax rules apply so that it is possible for the trust assets, income and gains to be taxed as if the beneficiary owned them, which is usually at a lower rate.
TAX ON TRUSTS
There are several reliefs that may be available when looking at the tax consequences of trusts. The main taxes to consider are Inheritance Tax (IHT), Capital Gains Tax (CGT) and Income Tax (IT), but there are others too. Depending on the assets put into the trust, IHT may be mitigated by reliefs for business or agricultural property, CGT may be ‘held over’ to a future point and IT may be payable by the trust but then repayable to the beneficiaries if income is given to them and if their circumstances dictate.
RIGHT YOU FOR?
Selecting the trust type and its terms are important and will vary with your circumstances and where you want your assets to end up. It may be that a trust isn’t the best option, however, with the options and flexibility available in setting up a trust it is always worth having that conversation with your accountant or tax adviser. Finally, when considering estate planning it is important to have a will in place. Dying intestate can have unexpected consequences for where your assets end up. At Bulley Davey we recently established our new wills writing service to help.
To find out more about Bulley Davey’s services contact Tom on and to investigate their new wills writing service contact Caroline Brearley on 01775 718850 or