What is a Trust and why create one?

Published by Aaron Brinkley on 5 February 2024

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Trusts can have a number of uses for financial and tax planning, especially in relation to the ownership of property. Find out more about how they could help you and your family.

Where a trust is established the legal ownership of the property is transferred to the trustees, and they have a duty to hold and apply these assets for the beneficiaries.

The terms of how the trustees may regulate enjoyment of the property by the beneficiaries will normally be set out in the Trust document (which is typically a Trust deed or the Will of the settlor, both of which must be drafted by a suitably qualified legal professional).

The settlor may nominate any person with mental capacity to act as a trustee and in many cases act as trustee themselves alongside a professional. A professional trustee company can also be appointed as a neutral party among a family dynamic.

This ensures the settlor has oversight on how the trust is run. Under the terms of the trust, the trustees may also retain the right to appoint or remove trustees/beneficiaries from the trust in the future.

Reasons for creating a Trust

The tax advantages regarding Trusts have been slightly negated by changes to legislation over the years, but Trusts still offer a significant degree of asset protection in passing assets to the next generation, along with being an important inheritance tax planning tool.

Asset Protection for Younger Beneficiaries

While beneficiaries are too young or not yet capable to either manage property/funds responsibly or not legally of age to hold the property in their own name, a trust enables the trustees to retain control over how and when the beneficiaries benefit from the trust property. This could be by way of funding their education or assisting with getting onto the property ladder.

Succession of Property

Gifting property away outright means the donor loses all control over those assets, as well as who ultimately benefits from the property in the future. As an alternative, placing assets in trust can protect against them leaving the family. This could happen on remarriage or where there are difficulties in family relationships.

One option to achieve this would be to settle property into trust for the use of the settlor’s spouse during their lifetime, with the assets ultimately passing to their children on the spouse’s death.

Protecting vulnerable persons

A settlor could create a Disabled Person’s Trust to assist a vulnerable or disabled person who may not be capable of managing their own finances. This allows the trustees to assist the beneficiary as appropriate and can help them manage the assets for their benefit.

Typically this would be through a Discretionary Trust. Such a Discretionary Trust will not usually impact any means tested benefits the beneficiary receives and is treated more favourably for tax purposes compared to other types of trust.

Inheritance Tax Advantages

Property that remains in one’s estate at their death may be subject to a rate of Inheritance Tax (IHT) of 40%. By placing property in Trust during lifetime, this will reduce the individual’s estate and can result in a much-reduced rate of IHT, subject to any relevant survivorship period from the date of the gift.

In addition, this will also ensure that any future growth in the value of the property, which can often be significant in the case of investments and residential property, will not remain in an individual’s estate and be subject to a potential IHT death rate of 40%.

Income Tax Advantages

The settlor may also suffer income tax at the higher or additional rates of 40% or 45%, on the income they are receiving from these assets personally.

Where this is the case, gifting income bearing assets into trust for beneficiaries who have a lower level of income may lead to a considerable income tax saving annually.

Further to this, the tax pool in a Discretionary Trust can be used to reclaim tax paid by the trustees on the trust income. Any income distributions from a discretionary trust have an associated 45% tax credit which is deducted from the tax pool.

If the beneficiary is a non-taxpayer, basic rate taxpayer or a higher rate taxpayer, they can reclaim the difference of 45%, 25% or 5% from this tax credit.

These are just some of the reasons why an individual may create a trust but the reasons and benefits of doing so will depend on each individual’s personal circumstances.

If you are interested in finding out more if creating a trust might be suitable for you then contact a member of our experienced and dedicated Trust team.

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