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How does setting up a Trust help you safeguard your assets for your loved ones?

27 February 2024

When planning for the future, it is important to consider how best to structure your assets so that your wealth can passed down to the next generation in the most tax-efficient way, as well as maintaining control over who manages those assets for your loved ones, particularly if they are minors or vulnerable adults. Setting up a Trust is an effective tool for achieving this during your lifetime, and this article looks at some of the types of Trust available and their potential tax implications.

What is a Trust?

A Trust is a legal arrangement in which a person (known as the settlor) transfers assets (such as property or investments) to trusted individuals (known as trustee/s) to hold and manage for the benefit of one or more individuals (known as beneficiaries).

The terms and conditions of the Trust, including how and when assets are distributed to beneficiaries, are usually outlined in a legal document known as a ‘Trust Deed.’

Why set up a Trust?

Trusts are an effective planning tool for:

1. Safeguarding your wealth;
2. Providing assets (during your lifetime or after your death) to someone who is not capable of handling their own affairs, for example, by reason of age or incapacity;
3. Managing and mitigating the effects of tax; and
4. Exercising control over who manages your assets and who benefits from them.

It is also possible to invest the funds to produce income or growth, ensuring the financial security of the Trust’s beneficiaries.

Types of UK Trusts

1. Bare Trust

A Bare Trust usually arises when assets are placed in trust for minor beneficiaries. The trustees will manage the assets until the beneficiary reaches the age of 18, at which point the beneficiary becomes immediately entitled to both the income and capital of the trust assets.

2. Discretionary Trust
   With a Discretionary Trust, the settlor names the beneficiaries they wish to benefit, but leaves it to the trustees to decide how much (if any) each potential beneficiary should get and when. This can be advantageous in situations where an outright gift would put a beneficiary at risk of squandering money or jeopardising their claim to state benefits.

3. Interest in Possession Trust
   This is where a beneficiary (commonly referred to as the life tenant) is entitled to the income produced by the trust fund or to the use of trust assets during their lifetime, or until another event occurs, such as remarriage. On termination of the life interest (for example, on the death of the life tenant), the capital assets are transferred to another individual or group of people (often referred to as the remaindermen). This is useful when, for example, a husband wants to allow his wife to occupy their property after his death but wants to ensure that his half share of the property passes to his children.

4. Will Trust
   A Will Trust is a provision in your Will that places some or all of your estate into trust, to be managed by the appointed trustees on behalf of your designated beneficiaries. The settlor is the testator of the Will, and the Will document will specify the parameters under which the Trust will operate. The most commonly used Will Trusts include a Bare Trust, a Discretionary Trust and a Life Interest Trust, as detailed above.

Tax Considerations

Whether you are the settlor, trustee or beneficiary, it is important to be aware of the tax liabilities relating to your type of Trust. The type of Trust created determines who is responsible for paying the tax, when the tax becomes payable, and what tax-free allowances and exemptions can be claimed. If tax is owed, the appropriate person(s) will need to file the required forms and pay the tax due within the deadlines provided by HMRC.

1. Capital Gains Tax

When assets are gifted into a Trust, transferred to beneficiaries, or sold during the Trust’s lifetime, capital gains tax may become payable if a gain is realised (i.e. the asset has increased in value since being placed in the Trust).

2. Inheritance Tax

Situations that can trigger inheritance tax liabilities include when assets are gifted into a Trust during a settlor’s lifetime, when assets are transferred out of a Trust to a beneficiary, when a Trust reaches a 10^th year anniversary, and when a life tenant chooses to ‘give up’ their life interest.

3. Income Tax

Income tax may be payable on any income received by the trust fund, and the rate of tax payable will depend on the type of income, whether the trustees or the beneficiaries are responsible for paying the tax, and if it’s the beneficiaries, then what type of tax payer they are.

How Redkite Solicitors can help

When it comes to creating a Trust, whether that is during your lifetime or after your death, it is important that the necessary documentation is properly drafted and correctly executed, so that your wishes can take effect as intended.

Redkite Solicitors have a specialist Trusts team who are dedicated to navigating clients through the complex rules and regulations surrounding Trusts and estate planning. They can assist you with drafting the relevant paperwork, advising you on the most suitable Trust depending on your own personal circumstances, and the applicable tax liabilities. If required, Redkite Solicitors can also act as professional trustees, allowing you to rest assured that your assets are being managed by independent trustees who will have your beneficiaries’ best interests in mind.

If you are ready to start planning for your future, please get in touch with us at enquiries@redkitelaw.co.uk, call us on 0333 014 4455, or contact your nearest Redkite office, details of which can be found at www.redkitesolicitors.co.uk

The information above does not constitute as legal advice. You should not take action or omit to take action based on this information. If you require advice on any of the issues raised, please get in touch using the details above.