Trusts

What is a trust?

A trust is a financial tool that you can use to protect assets for the benefit of someone else. They are usually set up:

• to manage family assets
• when someone is too young to handle their own affairs
• When someone is not mentally capable of handling their own affairs
• to pass on assets while you are still alive
• to pass on assets when you die (a ‘will trust’)

You (the settler) can create the trust using through a document called the trust deed. In the deed, you can appoint one or more trustees to manage the trust on behalf of a beneficiary.

What are the different types of trusts?

Bare trust

The beneficiary can have complete access to the capital and any interest earned in the trust if they choose. To do so, they must be at least 18 years old in England and Wales or at least 16 years old in Scotland. Until they choose to access it, the trustees are in charge of managing the trust on the beneficiary’s behalf.

Interest in possession trusts

The beneficiary has full access to all the income the trust earns, minus any expenses in managing the trust. They do not have any right to the capital. An interest in possession trust is often created through a will to provide income for the settlor’s spouse. When the spouse dies, what is left of the fund goes to the children or another named person.

Discretionary trusts

It is up the trustees how to run this type of trust, how to use its income and even how to distribute the assets of the trust.

Accumulation trusts

Trustees can use the income and capital to accumulate more capital. The beneficiary has a right to the original capital and the ‘accumulated’ capital.

Settlor-interested trusts

The settler of the trust can also be a beneficiary.

Parental trusts for children

Parents can set up trusts for children under the age of 18 who have never been married or in a civil partnership.

Do I have to pay inheritance tax on trusts?

If the trust contains assets, such as money, shares, property and land, inheritance tax will have to be paid. This will mainly be when:

• assets are transferred into a trust
• a trust reaches the 10 year anniversary of when it was set up (there are ten yearly inheritance tax charges)
• assets are moved out of a trust (‘exit charges’) or if  the trust ends
• someone dies and a trust is involved in sorting out their estate

When don’t I have to pay inheritance tax?

You may be able to reduce the inheritance tax that is paid on your estate. But it depends on what sort of trust you use.

Bare trusts

Assets in a bare trust may be exempt from inheritance tax, if the person who has put them in survives for at least seven years after setting it up.

Will trusts

A will trust is created by requesting in your will that some or all of your assets are put into a trust. Your personal representatives have to make sure that the trust has been created properly and that all taxes have been paid. The trustees will also need to make sure that inheritance tax is paid on any future charges.

Trusts for bereaved minors

No inheritance tax charges will have to be paid as long as it was set up for a bereaved minor and the minor will be fully entitled to the assets by the age of 18.

Trusts for disabled beneficiaries

If the settlor survives for at least seven years after setting up a disabled beneficiary trust, there will be no need to pay inheritance tax or ten yearly or exit charge as long as the assets are for the use of the intended disabled beneficiary.

Interest in possession trusts

The inheritance tax rules that apply to this type of trust will depend on the date that assets were put into the trust:

• assets transferred in before 22 March 2006 are exempt from inheritance tax
• the ten-yearly inheritance tax charge may have to be paid on assets put in or after 22 March 2006
• there will be no need to pay inheritance tax on an asset as long as it stays in the trust for the beneficiary during the life of the trust
• on assets transferred in between 22 March 2006 and 5 October 2008, there will be no inheritance tax to pay if the beneficiaries of the trust passed on their interest to other beneficiaries
• from 5 October 2008, if an interest is transferred there may be a charge of 20 per cent and the ten yearly inheritance tax charge will be payable, unless it is the trust is for a disabled person
• if you inherit an interest in possession trust from someone who has died, there is no ten-yearly inheritance tax charge. But, 40 per cent tax will be due when you die.