Trusts – What Are They And How Do They Work?Written on May 29, 2025 by Kirk Rice LLP
In this article we look at how different trusts work, including property, bare trusts, and trust investments, as well as the tax implications.
Trusts – holiday, rental, buy to let, or investment property
An unmarried couple are selling their Berkshire home to move into what was their let property. The let property has been owned by just one of them for 15 years and they have instructed their lawyer to change the ownership to joint. This will mean capital gains tax (CGT) will be due on the owner of the property, at the highest rate (28%) due to their personal income.
If the property is transferred to a trust the CGT can be deferred until a future change of ownership or perhaps when it is sold. If CGT reduces in the future, a tax saving might be achievable. Deferral also means they have more money to spend on furnishing and other lifestyle needs for themselves now.
If you browse the internet, you’ll find there are numerous terms to describe trusts, but the essential factor is whether the trustees can exercise their discretion over the beneficiaries and the assets of the trust. Deferral of CGT is only possible if it is a discretionary trust or an interest in possession set up during the lifetime of the settlor
Changing the ownership of property could result in stamp duty if it is mortgaged. Inheritance tax could also be incurred immediately if the value of the property transferred into a trust exceeds £325,000. Yes, that’s right, inheritance tax becomes payable while you are still alive, but at 50% of the death rate.
So, due to the complex interaction of factors, I recommend you share full details of your situation with your legal, tax and financial professionals before acting.
Trusts for grandchildren
It is not uncommon for grandparents to open and manage building society accounts for their grandchildren which means at age 18 the grandchild becomes legally entitled to manage it themselves. Most grandparents manage the balance accordingly to avoid providing access to a large cash sum at that time. These arrangements are used to support school fees and other activities of growing up. As long as the donor (grandparent in this example) survives 7 years from the date of the gift there is no inheritance tax payable.
This type of arrangement is known as a bare trust, and it could also be included in wills. Anyone could set this type of arrangement up for a child; however, a parent could suffer additional income tax so should seek specific advice before setting up an arrangement. The main point to be aware of is that the grandchild has access to the money from age 18. If you do not want the grandchild to have access at 18, then a discretionary trust might be more effective.
Consideration of the child’s income tax liability on any arrangement should be considered along with who should be trustees and how the trust can achieve your aims.
Taxation of Trusts
Trusts have liabilities for income, gains and inheritance tax as well as allowances and reliefs. It is essential you have a good understanding of these and how this can affect your trust. Careful management of this can avoid unwelcome and unexpected tax liabilities.
Trust investments
There are investment products designed to reduce the burden of tax reporting, which are legally classified as non-income generating as well as without liability to CGT. Profit will be liable to income tax only, but only at times chosen by the trustees. These products are best suited to long term investments of a trust.
If you are interested in discussing the best trust options for you, please contact us via email info@kirkrice.co.uk.
Please note: answers are given for general guidance only and specific advice should be taken before acting on any of the suggestions made. The information is based on current tax legislation which may change in future.
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