Personal Tax Planning

Trusts

What is a trust?

Put simply, a trust is an alternative form of a gift. A normal gift to another individual means that the recipient is free to do as they please with it. But with a trust you retain some degree of control over the asset (such as a property).

A trust is created when a property is gifted to trustees. Then these trustees hold the property on behalf of the beneficiary of the property.

What are trusts used for?

Many people consider trusts to be mechanisms for reducing the amount of tax paid. And while trusts can certainly be used for tax planning, their main purpose is to enable a donor to gift an asset without losing control of it. In short, the beneficiary does not have absolute control of the gifted property.

For example, as a parent, you may want to gift a property to a son or a daughter. You might not want them to have absolute control of the property though, until they reach a certain age.

Are trusts difficult to set up?

No. First the property’s trustees and beneficiaries need to be agreed. Then a trust deed can be written up. (Solicitors are usually involved in the drafting of the trust deed.)

Do trusts have tax implications for the donor?

Yes. Capital gains tax must be paid on the sale of some of the assets (which includes a disposal by way of gift). So, any assets that have been held for a while, and have grown in value, need to be considered carefully before they are gifted to a trust.

Depending on the asset though, there are various reliefs available to reduce or mitigate your capital gains tax liability.

If the value of a gift to a trust is greater than the nil-rate band (£325’000) then it’s possible you might have to pay lifetime inheritance. The lifetime inheritance tax rate is 20%.

What are the tax implications for a trust?

This depends on the type of trust. However, in many ways the tax regime for a trust is similar to individuals – although the rates can differ. For example, any profits that a trust makes from renting a property will be subject to income tax. A trust will generally have the trust rate applied to this income at 45%.

If a trust disposes of an asset then capital gains tax will apply. One particular type of trust, known as a discretionary trust, will also need to take account of a ten-year anniversary charge. This is an inheritance tax liability charged on the trust’s assets.