Different trusts explained

By August 10, 2021Estate Planning

This content is for information and inspiration purposes only. It should not be taken as financial or investment advice. To receive personalised, regulated financial advice regarding your affairs please consult us here at WMM (financial planning in Oxford).

There is a widespread perception that using a trust can help someone avoid inheritance tax (IHT). This is not strictly true, although trusts can help with IHT mitigation when used properly. Part of the confusion lies in the wide range of trust types that exist. In this article, our financial planning team at WMM offers a brief overview of the main varieties that exist in 2021, and how they can be used in estate planning.

 

Trust types

There are at least seven main types of trust in the UK. Each one works and is taxed differently, requiring different strategies for an estate plan. Here is a summary of each one:

  • Bare trusts. These are often used to pass on wealth to young people. Until they are old enough, the trustees look after the assets. Once he/she reaches age 18 (in England), however, they have the right to everything in the trust.
  • Interest in possession trusts. Here, the trustee(s) pass any income generated by the assets in the trust (such as dividends, minus expenses) to the ‘income’ beneficiaries, for a prescribed period of time, most often their lifetime (the beneficiary being the life tenant in this scenario). On the death of the income beneficiary, the assets of the trust are usually passed to the ‘capital beneficiary’.
  • Discretionary trusts. This type of trust empowers trustees – via the trust deed – to make decisions about how to use the income (and, sometimes, the capital) including when, how much and to whom disbursements are made. 
  • Accumulation trusts. Often described as a subtype of discretionary trust, here, trustees can gather income within the trust – building on the existing capital. 
  • Mixed trusts. This combines different types of trust – e.g. certain assets may be designated to an interest in possession trust and the rest to a discretionary trust.
  • Settlor-interested trusts. Here, you (the settlor) or a family member can benefit from the trust. For instance, if you believe you will be incapacitated by illness one day, you can set aside assets in a trust for your spouse, civil partner or child.
  • Non-resident trusts. If trustees are not resident in the UK for tax purposes, then this trust can be a useful option. Bear in mind that the tax rules here are very complex.

 

Trusts and IHT

The spirit of a trust is not, at its core, to avoid IHT. Rather, the UK government allows them to provide more control to people who want to pass down their assets – as well as to those who want to improve society. As such, many of the tax benefits can be found in relation to charitable trusts, trusts for disabled or vulnerable people, and so on.

A trust can reduce IHT via the “seven year rule”. After you place assets in a trust, IHT no longer applies to them if you survive another seven years. If you die within that time, however, then you need to pay IHT at the full amount (40%) instead of at the taper, which applies when you make a normal gift to someone – outside of a trust structure.

 

Important note on trust registration

For trustees and for those using/considering a trust structure for their estate plan, please bear in mind that new trust rules will apply in the UK by late 2022. In particular, the 5th Money Laundering Directive initially required that almost all trusts be registered by March 2021, however this has been delayed until Autumn 2022 following issues with the new Registration Service.

The registration must be done using the online Trust Registration Service (TRS). This new system will replace the paper 41G (Trust) form and the “ad hoc system” whereby trustees could notify HMRC when changes in circumstance happened. Even those trusts which were registered many years ago may need to go through TRS to comply with legislation. If you are at all unsure about whether this affects you, please speak to a financial adviser.

 

Invitation

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You can call us on 01869 331469