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Trusts

What is an Trust?

An Trust is a way of managing money, investments, land or buildings for a specified group of people.

Trusts are usually treated as separate entities for tax purposes so can often be used for effective tax planning.

Special tax rules applies to trusts and, in most cases, a new trust has to be registered with HMRC.

There are a number of specific types of trust that have advantageous tax treatments. For instance

  • charitable trusts
  • trusts for minors (under 18s)
  • trusts for disabled people

However, for general purposes, there are two main types of trusts:

  • life interest trusts
  • discretionary trusts (technically relevant property trusts)

Life Interest Trusts

In simple terms this allows a person (the beneficiary or life tenant) to have the right to the income from an investment or the use of an asset (e.g. a house) for life. When that person dies then the investment/asset passes on to a named person or persons.

This can be a useful tool for tax planning and for ensuring assets stay in the family, sometimes called a "blood line" trust.

Discretionary Trusts

This is the most common type of trust used, for example, in Wills, asset protection trusts, life insurance trusts and family trusts. The trust will nominate a number of potential beneficiaries who might receive something but nobody is usually entitled as of right. Who gets what and when is at the discretion of the trustees, hence the name.

These trusts are subject to income tax at the highest rate and possibly Inheritance Tax every ten years but careful planning and administration can mean that no tax actually has to be paid.

Payments into trusts reduce the nil-rate band allowance for the next seven years and if the payment exceeds the NRB then some tax is immediately payable at 20%.

However, the main advantage is that discretionary trusts form a separate pool of funds that is taxed separately (eventually) and therefore increases the total fund that is exempt from IHT.

Payments into trusts can inadvertently extend the 7 year tax rule to 14 years, a principle known as the "backward shadow".

Therefore whilst trusts can be a very effective way of protecting assets for the family and minimising Inheritance Tax, it is clearly a complex area with pitfalls for the unwary and expert advice should always be taken.

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