The tax benefits of setting up a family trust

When individuals are considering making gifts it isn’t uncommon for one of their concerns to be asset protection. A lot of the time it isn’t that they do not trust their family, but external influences.

Family trusts are typically used with this in mind, as well as maximising the tax benefits. As part of creating the trust you need to appoint trustees who will manage the assets and income. Trustees will typically include the person(s) who have created the trust, during their lifetime, but also other family members, friends or professional advisers. A letter of wishes is drawn up alongside the trust documentation setting out how you would like the trust to be managed.

The beneficiaries will be able to enjoy the use of the assets or the income generated by them. Trusts can be set up as a discretionary trust allowing the trustees full discretion as to how the assets and income are used.

There are a number of tax considerations for the use of these structures. The main tax benefits include:

• The value of the gift made falls outside of your estate after 7 years from the date of the gift
• Any growth in value of these assets are outside of any individuals estate for inheritance tax (IHT) purposes
• The assets can generally be transferred free from capital gains tax
• Income generated will ultimately be taxed on another family member potentially reducing the family’s overall income tax position

Trusts are subject to tax including its own IHT charges. When considering the use of this type of structure you need to understand all the tax considerations before an informed decision can be made.

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