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What is a Trust?

Trusts have traditionally been seen as the way the super-rich shelter their assets from the taxman - as illustrated by the saying: ‘For those willing to stump up for crafty accountants, trusts will simply melt away a tax liability’.

However, the reality is far less exciting. Trusts are certainly a useful tax planning tool, but many of the loopholes have been closed and they are not a panacea for all tax liabilities. That said, they are also not just for the very rich. Anyone whose home or other assets pushes them above the inheritance tax threshold could benefit from using trusts for tax planning or for the controlled passing over of assets to beneficiaries.

So what is a Trust? 

In its simplest form, a trust is a legal obligation binding an individual or a company (the trustee) to deal with certain assets for the benefit of one or more beneficiaries. Individual beneficiaries may benefit from the trust in different ways – for example, one may receive the income and another the capital. However, the trustees are the legal owners of those assets and the trust agreement will set out how they should look after the assets and for what purpose.

Assets within a trust can include cash, land or buildings, investments or assets such as equities and collective investments or even individual items such as paintings or antiques. There are a number of different types of trust, each with their own rules and tax treatments - the five main types being bare trusts; interest in possession trusts; accumulation and maintenance trusts, discretionary trusts; and mixed trusts - and the way in which income generated by the assets is dealt with in each type will generate a different tax charge. Each will also offer different rules for the rights of beneficiaries and for the role of the trustees, the details of which will be decided on by the settlor (the creator of the trust) and set out in the trust deed.

Trusts can be a useful tool in tax planning, particularly for inheritance tax. For example, they can be a way to ensure that nil rate bands are used when passing money to children. Often, however, they are simply used for succession planning – to ensure everyone receives the right amount of money at the right time.

Download: A Guide to Trusts

To contact John Pearson, who is a specialist Private Client solicitor, please use the details provided below.