Trusts – putting the right money, in the right hands, at the right time

What is a trust?

A trust is a legal arrangement where you give cash, property or investments to someone else – a trustee or group of trustees – so they can look after it and use the assets for the benefit of one or more people.

It’s a useful way to put the right money, in the right hands, at the right time.

Why consider a trust?

The main benefits of a trust include:

1. Helping to reduce income tax, capital gains tax and inheritance tax
2. The ability to pass your wealth on to your family – children and grandchildren – assigning it to specific family members
3. Helping to ringfence and protect your wealth in the case of divorce or bankruptcy of a beneficiary
   

Inheritance tax mitigation

If you transfer assets – cash, investments or property – into some trusts, the assets no longer belong to you or your estate, provided specific rules are met.

This means that upon death, the value of these assets might not be included when your inheritance tax bill is calculated.

There are many types of trusts, some of which are treated differently for inheritance tax purposes. Visit trusts and inheritance tax for more information or speak to your adviser.

Want to leave money to your children, but don’t want them to spend it all at once?

Keeping assets in trust avoids handing over valuable property, cash or investments while children or grandchildren are relatively young or vulnerable.

When you set up a trust, you can decide how it’s managed, including who the beneficiaries might be, what assets they get and when – for example when they reach 25.

If you’re not sure who you want to benefit or how to share out your assets, you can select trustees to make this decision for you. These trustees have to look after and manage the assets for the person or people who will benefit from the trust – this is a legal duty.

Types of trust

There are several different types of trust, but here are the two main types:

1. Absolute or Bare Trust: When you set up the trust you have to select both the beneficiaries and their share of the trust fund – you can’t change it after it’s been set up.
2. Discretionary Trust: The trustees must decide who’ll benefit and when. A list of beneficiaries would be set out in the trust and the trustees can allocate assets to them if they want. This kind of trust is useful to set up for grandchildren, for example. You could leave it to the trustees – who could be the grandchildren’s parents – to decide how to divide the income and capital between the grandchildren. The trustees will have the power to make investment decisions on behalf of the trust.

Some trusts are subject to their own inheritance tax rules. In some cases, when the assets have successfully been transferred into trust, they’re no longer subject to inheritance tax on your death. However, there is a need to plan ahead as the trust doesn’t necessarily remove assets from an estate for inheritance tax immediately.

Other trusts may be subject to inheritance tax, or pay income and capital gains tax at higher rates. Trusts can also be expensive to set up, depending on the type of trust and complexity.

This information is based on our current understanding of taxation law and practice in the UK. Tax rules can change and the impact of taxation, and any tax relief, depends on your personal circumstances and where you live.

Trusts are not regulated by the Financial Conduct Authority.

Get advice

Trusts can be a complex area which is why we recommend getting financial advice. We have specialist advisers who can talk through all of the options, explaining how trusts work and the benefits of each in more detail. We can also offer ongoing advice to help any trustees manage the trust in line with changes to regulation, changes in your circumstances and to ensure the recommendation continues to meet your needs. Get in touch with your adviser if you’d like to speak to a trust specialist.