Trusts & Gifting

A Trust is a legal arrangement in which you give money, property, assets or investments to a 3rd party to manage manage for the benefit of someone else. The assets are held in Trust for the elected beneficiary(s).

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What is a trust?

Provided that certain conditions are met, the assets you put into a trust no longer belong to you. As such, a trust can be an advantageous way to cut your inheritance tax (IHT) bill, for example.

The Money Advice Service (set up by the Government to provide independent financial advice) has created a guide to help you use trusts to cut your inheritance tax bill specifically.

Trusts have been around for a long time. The Financial Times confirms that: "Trusts are a centuries-old concept which allow assets to be held by trustees on behalf of beneficiaries. They have been used in Britain since the Middle Ages, when knights departing for the crusades used them to protect their interests and look after their wives and children."

As the rules surrounding trusts can be quite complicated, it is always best to seek the advice of an IFA who can guide you through your choices and ensure that you are making the best decisions for your situation.

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Why put money in a trust?

People from a wide variety of circumstances use trusts for different reasons. For example, you could use a trust to put aside money to pay for your future care if you become ill, or to pay grandkids’ school fees, avoid dreaded inheritance tax, or protect assets from divorce or bankruptcy.

Anything that is considered an asset can be put into a trust. This can include money, property, investments (stocks and shares) as well as valuables (such as an art collection, for example).

Trusts are also used to support someone who can’t manage their money themselves (a child or someone with severe disabilities or mental health problems, for example).

The main advantages of trusts is that they allow you:

  • Put conditions on how and when your assets are distributed
  • Reduce estate and gift taxes
  • Distribute assets to heirs efficiently without the cost and delay of probate court.
  • Name a trustee, who not only manages your trust after you die, but is empowered to manage the trust assets if you become unable to do so
  • Better protect your assets from creditors and lawsuits

Trusts are not regulated by the Financial Conduct Authority and in some situations legal advice should be sought.

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    Who’s involved in a trust?

    The Settlor: this is the person who sets up the trust and puts assets into it. They decide how the assets in a trust should be used.

    The Trustee: the trustee is the legal owner of the assets in a trust and manages the trust for you, according to your wishes. The trustee can be an individual (usually a family member or a trusted friend) or a company who manages trusts, or a firm of solicitors.

    There are certain responsibilities that trustees have, depending on the type of trust they are involved with. The trustee may be expected to deal with income and capital distributions, keep thorough accounts, monitor the assets of the trust, and submit tax returns.

    The Beneficiary: this is the person (or persons) whom you intend to benefit from the trust. They can receive either or both the income and capital of a trust.

    Example: if you wanted to set up a trust for your future medical care, you would be the settlor, your money would be the trust property, your friend (or partner, or whoever you nominate) would be the trustee, and you would be the beneficiary.

    What does money in trust mean?

    The term "money in trust" refers to the trust property (see above). If there is "money in trust" it means that the beneficiary of a trust will receive the assets held (the trust property) when the particular conditions of the trust have been met.

    So when can I access money in a trust?

    If you are the beneficiary of a trust, you can access the money in it when the conditions of the particular trust have been met. A common type of trust involves grandparents putting away assets for their grandchildren – who can then access the assets when they reach an appropriate age (often 18 or 21).

    There are many different trust types available. Because the legal jargon can get quite complicated, it is worth consulting with your IFA and even a solicitor to ensure you are making the right kind of trust for your circumstances and one that will comply exactly with your wishes.

    You can specify just about anything in a trust (who gets paid, how often, when and under what circumstances). But the more tailored your requirements and the more conditions they carry, the more expensive the trust will be to set up.

    As a guide, there are several main types of trust:

    • Bare trust: this is the simplest kind and the one often used to hold assets for children. The assets are held in the name of a trustee until the beneficiary turns 18, at which point they become entitled to both the assets and the income of the trust.
    • Interest in possession trust: in this type of trust the beneficiary is entitled to all income that the trust generates (interest or gains from stocks and shares for example) but not the trust property itself. This kind of trust is popular with divorcees who have remarried but have children from the first marriage. This trust allows you to provide for your partner while they are alive with the understanding that the trust property (the assets held in trust), will pass to your children upon your partner’s death.
    • Discretionary trust: Discretionary trusts give you greater flexibility and can be used to allow your trustees to specify who gets paid what and when. They hand over absolute power to the trustees to decide how the assets in the trust should be distributed (for example your children could be trustees with a view to them deciding how the income and capital should be divided between the grandchildren as beneficiaries). This can be a useful trust when you have decided upon a few people you would like to potentially benefit from your assets, but are unsure exactly who will need financial help in the future. If handing over complete control is not something you wish to do (or you are uncertain your wishes will be carried out), you can always name yourself a trustee to ensure you have a say over where the money goes.
    • Non-resident trust: These are trusts where usually either none or some of the trustees are non-UK residents for tax purposes. It also applies to the settlor who is non-resident in the UK at the time of establishing the trust or adding to the trust. It can be a way of negating tax liability, though the rules surrounding it can be quite complex and generally require the help of an expert or IFA who can help asses the tax liability. Residency is a complicated subject in itself and you need to be clear about your residency status (as opposed to domicile status) in setting up a trust of this nature.

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    Can money in a trust be invested?

    Unless the settlor (ie. the individual that has set up the trust) has specified restrictions surrounding investment, the trustees choose how to invest the money in the trust themselves or procure the services of a managed fund – your IFA is best placed to help you make these decisions.

    Is money in trust taxable?

    There is no short or uncomplicated answer to this question – in large part it depends on the type of trust, who is benefitting from the trust, and the residency status of the trust itself.

    It can be useful to think of a trust as a separate taxable entity and calculate your tax liability from there.

    To give some scale to this, according to HMRC at the last count (2014-15) there were about 91,500 discretionary trusts filing self-assessment tax returns in the UK.

    As a general starting point there are 3 major questions you should ask yourself and discuss with your adviser regarding tax and trusts:

    1. What income is taxable?
    2. How will the tax be calculated?
    3. When will the tax be due?

    And remember this important fact:"Different types of trust have different rates of income tax" (HMRC guidelines).

    Who pays tax on Trusts?

    Discretionary trusts:

    Trustees are responsible for paying tax on income received from discretionary trusts at the following rates:

    • Up to £1000 – 7.5% on dividend-type income, 20% on all other income
    • Over £1000 – 38.1% on dividend-type income, 45% on all other income types

    Possession trusts:

    Trustees (unless mandated to the beneficiary) are responsible for income tax at the following rates:

    • 7.5% on dividend-type income
    • 20% on all other income types

    Bare trusts:

    Beneficiaries are responsible for paying tax on bare trusts and need to complete a self-assessment tax return.

    Tax rates, allowances and reliefs are as at May 2019 and are subject to change in the future. The benefit of any allowances and reliefs depends upon your personal situation and may also change over time.

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