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Trusts offer a means of holding and managing money or property for people who may not be ready or able to manage it for themselves. Used in conjunction with a will, they can also help ensure that your assets are passed on in accordance with your wishes after you die. Here we take a look at the main types of UK family trust. What is a trust? A trust is an obligation binding a person called a trustee to deal with property in a particular way for the benefit of one or more ‘beneficiaries’. Settlor The settlor creates the trust and puts property into it at the start, often adding more later. The settlor says in the trust deed how the trust’s property and income should be used. Trustee Trustees are the ‘legal owners’ of the trust property and must deal with it in the way set out in the trust deed. They also deal with the trust administration. There can be one or more trustees. Beneficiary This is anyone who benefits from the trust. The trust deed may name the beneficiaries individually or define a class of beneficiary, such as the settlor’s family. Trust property This is the property (or ‘capital’) that is put into the trust by the settlor. It can be anything, including: - land or property
- shares
- money
- antiques or other valuable property
Examples of when a trust might be created A trust might be created in various circumstances: - when someone’s too young to handle their affairs
- when someone can’t handle their affairs because they’re incapacitated
- to pass on money or property while you’re still alive
- under the terms of a will
- where there's no will
The main types of private UK trust Bare trust
In a bare trust the property is held in the trustee’s name – but the beneficiary can take both the income and trust property whenever they want. You might, for example, use this type of trust to pass gifts to children while you’re still alive. Interest in possession trust
With an interest in possession trust the beneficiaries have a legal right to all the trust’s income (after tax and expenses), but not to the property. You can, for example, set up an interest in possession trust in your will. You might then leave the income from the trust property to your partner for life and the trust property itself to your children when your partner dies. Discretionary trust
With a discretionary trust the trustees decide how much income or capital, if any, to pay to each of the beneficiaries – but none has an automatic right to either. A discretionary trust is a way you can pass on property while you’re still alive and still keep some control over it through the terms of the trust deed. Accumulation and maintenance trust
An accumulation and maintenance trust is used to provide money to look after grandchildren when they’re young. Any income that isn’t spent is added to the trust property, all of which later passes to the grandchildren. In England and Wales the beneficiaries become entitled to the trust property between ages 18 and 25. At that point the trust turns into an ‘income in possession’ trust. In Scotland, the trust usually ends when the beneficiaries reach 16. Mixed trust
A mixed trust may come about when one beneficiary of an accumulation and maintenance trust reaches 18 and others are still minors. Part of the trust then becomes an interest in possession trust. Tax on UK trusts Trusts, like limited companies, are taxed as entities in their own right. The beneficiaries pay tax separately on income they receive from trust - at their usual tax rates, after allowances. Setting up a trust – get professional advice Trusts are very complicated, and you may have to pay Capital Gains Tax when putting in property. Before setting one up it’s a good idea to get advice from a solicitor, who can also draw up the trust deed and give you advice on related legal matters. It’s also advisable to speak to a tax adviser or accountant before agreeing to be a trustee.
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