Trusts are still a mystery to people. Many consider them as tools only rich people use for taxation purposes. But trusts can be useful in many situations – they are essentially just a good way of managing wealth. Let’s look at trusts in more detail and discover how to set up a trust.
What is a trust?
A Trust is a legal arrangement that allows one or more people to control money or assets placed into it and use them for the benefit of one or more people. The parts that form a trust are officially called:
- Trustees – the people or the company in control of the trust
- Trust property – the money or assets in the trust
- Settlor – the person who puts assets into the trust
- Beneficiaries – the people who benefit from the trust
You can use money, investments or other assets in the trust but the type of trust you have may influence the way trustees need to pay tax.
The different types of trusts
There are several trust types available. Each type of trust is taxed differently and the relationships between trustees, trust property and beneficiaries can change as well. The most common types of trusts are:
- Bare trusts – Assets are held in the name of a trustee but the beneficiary has the right to all the capital and income when they turn 18 or over (England and Wales) or 16 (Scotland).
- Interest in possession trusts – Trustees pass on all trust income to the beneficiary as it arises.
- Discretionary trusts – Trustees are allowed to make decisions on how to use the income and, in some cases, the capital.
- Accumulation trusts – Similar to discretionary trusts, trustees can pay income out and in general, are meant to accumulate income within the trust.
- Settlor-interested trusts – The settlor or their spouse or civil partner benefits from the trust.
- Mixed trust – A combination of more than one type of trust with different parts taxed accordingly.
Selecting the right type of trust will depend on the reasons you want to start a trust and its wider purpose.
Why you might set up a trust
There are many uses for a trust and you might consider setting up one if:
- You want to support someone who might not be in the position to manage their money.
- You want to make sure your assets are used to look after you in case you won’t be able to do so.
A trust is commonly used if you have a child with a special needs condition and you are worried about how they can manage financially. People often set up trusts for children even when they might not have any disability to help ensure the child uses the money correctly or has it available as they enter adulthood.
How to set up a trust
Setting up a trust takes a bit of time and it’s important to get everything organised correctly. It’s recommended to have a solicitor to help you – it guarantees the legal wording of a trust is correct.
An important part of setting up a trust involves selecting your trustees. You have to choose people you know you can rely on and it’s crucial to make sure the person or persons are happy to take on this responsibility. You should have at least two trustees but for most trusts, you don’t want to exceed four trustees to keep it simple and effective. It is possible to appoint a company as a trustee. For example, it could be a bank or a firm of solicitors.
You also need to specify the beneficiaries and think about how you want the assets passed on to them. For example, do you want to pay them a specific income and at what point? It’s also essential to think about the assets you want to transfer to the trust.
With a solicitor, you can draw the official legal documentation to set up a trust. For a start, you do want to have an outline of the terms, including:
- The objectives of the trust
- The terms under which benefits are paid
- The way the trust would be terminated or settled
- The way the trust is operated
Setting up a trust won’t be free. The cost comes mainly from instructing the solicitor but using one is highly recommended to avoid problems or issues later on.
Trusts and taxes
As mentioned, different types of trusts have different taxation. When thinking about how to set up a trust, understanding the impact of taxation can be crucial. HMRC has a comprehensive guide on Trusts and Taxes, which is a great source of information.
In short, trustees are often responsible for paying tax on income accumulated by the trust. This often involves filing a Self-Assessment return. In terms of Capital Gains Tax, it might come into question when:
- Assets are placed into a trust
- Assets are taken out of a trust
Trustees are often in charge of paying CGT and they are allowed to deduct costs to reduce gains. There might be other tax reliefs available – for instance, Entrepreneurs’ Relief is available for trustees in certain cases. Furthermore, CGT is only payable if the total taxable gain is above the trust’s tax-free allowance, which is:
- £12,000 if the beneficiary is vulnerable
Trusts might also have to deal with Inheritance Tax. You can find out more about it from our previous blog post.
Getting help with running a trust
To set up a trust, you will need to handle a lot of legal jargon. The documentation should be precise which is why it helps to hire someone to set it up or guide you through it. This guarantees you get a trust that works for all the parties involved with it.
We at Devonshire Green have been helping trusts for years. We can advise you when you are thinking about setting up a trust or guide you through the taxation of your current trust. Contact us today to talk more about how we can help.