Trusts are very useful tools and can be used in many different circumstances but financial and legal advice should be taken. They can be used by individuals for family protection, inheritance tax planning and business protection. The Trust will make sure that proceeds are paid via the Trustees to beneficiaries without increasing an estate’s value and all are recommended on an individual basis. (The Financial Conduct Authority Ltd does not regulate Trusts)
A Trust is a legal arrangement where you give cash, property or investments to someone else so they can look after them for the benefit of a third person. You could put some of your savings aside in a Trust for your children and once the Trust has been established, you no longer own the asset and it may not count towards your inheritance tax bill.
There are four important roles in any Trust that you should understand:-
• The Settlor is the person who gives the Trust assets
• The Trust owns the assets and they have their own tax treatment
• The Trustees control their assets within the Trust
• The Beneficiary is the person who the trust is set up for and they will get the benefit of the money, property or investments
A trust can be a great way to reduce the tax you will pay on your estate. If you put assets into a Trust, they no longer belong to you therefore, when you die their value normally will not be counted within your estate when your Inheritance Tax bill is calculated.
The cash, investments or property belong to the Trust, which has a legal duty to look after them for the person who will benefit from it in the end. When you set up a Trust you decide the rules about how it is managed – for example, you could say that your children will get access to their Trust when they are 18. There are several different kinds of Trust. Some you can write into your Will, while others you can set up immediately. Some Trusts will have to pay Inheritance Tax in their own right rather than as part of your tax bill; others might have to pay Income Tax or Capital Gains Tax. The kind of Trust you choose depends on what you want it to do.
Here are some of the most common options:-
• Bare Trust - the simplest kind of Trust. A Bare Trust just gives everything to the beneficiary straight away (as long as they are over 18).
• Interest in possession Trust - the beneficiary can get income from the Trust straight away, but does not have a right to the cash, property or investments that generate that income. The beneficiary will need to pay income tax on the income received. You could set up this kind of Trust for your partner, with the understanding that when they die the investments in the Trust will pass to your children.
• Discretionary Trust - the trustees have absolute power to decide how the assets in the Trust are distributed. You could set up this kind of Trust for your grandchildren and 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.
• Mixed Trust - combines elements from different kinds of Trusts. For example, a beneficiary might have an interest in a possession (i.e. a right to the income) of half of the trust fund and the remaining half of the trust fund could be held on discretionary trust.
• Trust for a vulnerable person - if the only one who benefits from the trust is a vulnerable person, for example, someone with a disability or an orphaned child – then there is usually less tax to pay on income and profits from the Trust.
• Non-resident trust - a Trust where all the trustees are resident outside the UK. This can sometimes mean the trustees pay no tax or a reduced amount of tax on income from the Trust.
It is possible to be the Settlor and the Trustee of a Trust so, as a settlor you could give away an asset in to a Trust and be a trustee, thus able to still control that asset. A settlor cannot also be a beneficiary but a person can act as a trustee and be a beneficiary.
There are many different Trusts and these Trusts can be used for many different reasons so advice, both legal and financial should be sought.
The Financial Conduct Authority does not regulate tax and trust advice.
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