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An introduction to UK family trusts
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An introduction to UK family trusts

An introduction to UK family trusts

Trusts offer a way of holding and managing money or property (investments, land or buildings and other valuable assets, eg paintings) for people who may not be ready or able to manage it for themselves. Used with a will, trusts can also help ensure that your assets are passed on in accordance with your wishes after you die. This article covers the basics and outlines the main types of UK family trust.

Trusts can be complicated and a solicitor is usually involved in setting them up.

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 (sometimes known as a 'settlement') and puts property into it at the start, often adding more later. The settlor has to say in the trust deed how the trust's property and income should be used - this is the basis for the 'terms' of the trust.

Trustee

Trustees administer the trust and must deal with the trust property as set out in the trust deed. There can be one or more trustees.

Beneficiary

This is anyone who benefits from the property held in the trust. The trust deed may name the beneficiaries individually or define a class of beneficiary, such as the settlor's family.

Trust property

The 'property' is all the assets put into the trust by the settlor. It can be anything, including:

land or buildings
investments
money
antiques or other valuable property

The cash and investments held in the trust are also called the 'capital' or 'fund' of the trust. This capital (or fund) may produce income, such as interest or dividends. The land and buildings may produce rental income.

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 is unable to handle their affairs because of disability or illness
to pass on money or property while you're still alive
under the terms of a will
when someone dies without leaving a will (England and Wales only)

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 actual possession of both the income and trust property whenever they want. Any income of the trust is treated as the beneficiary's and not as belonging to the trust. You might, for example, use this type of trust to pass gifts to children while you're still alive.

Interest in possession trust

In an interest in possession trust the beneficiary has a legal right to all the trust's income (after tax and expenses), but not to the property in the trust. The assets in the trust will pass to someone else at a specific time in the future, for example after the income beneficiary dies.

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

The trustees of a discretionary trust decide how much income or capital, if any, to pay to each of the beneficiaries - but none has an automatic right to either. You can use a discretionary trust as a way to pass on property while you're still alive and still keep some control over it when you set up the terms of the trust deed.

Accumulation and maintenance trust

An accumulation and maintenance trust is set up by the settlor for young beneficiaries and is used to provide money to look after them. Any income that isn't spent is added to the trust property, all of which later passes to the beneficiaries at a specified age. If the beneficiaries are the settlor's minor children, the income of the trust could be taxable on the settlor.

In England and Wales the beneficiaries become entitled to the trust property when they reach the age of 18. At that point the trust turns into an 'interest in possession' trust. The position is different in Scotland, as, once a beneficiary reaches the age of 16, he could require the trustees to hand over the trust property.

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.

More on types of family trust including worked examples

Tax on income from UK trusts

Trustees are taxed as persons in receipt of income. Beneficiaries pay tax separately on income they receive from the trust - at their usual tax rates, after allowances. The trustees will give beneficiaries a statement after the end of each tax year showing the income entitlement in that year and any income tax deducted. This can be used to support any repayment due.

Tax on income and gains from UK family trusts - Directgov website

Taxation of assets settled on trusts

How a particular type of trust is charged to tax will depend upon the nature of that trust. For example Inheritance Tax may be charged when putting property into some trusts, and/or on other chargeable occasions for instance when further property is added to the trust, on distributions of capital from the trust, or on the ten-yearly anniversary of the setting up of the trust.

The trust may be liable for Capital Gains tax.

Further information on trusts and Capital Gains tax

HMRC Inheritance Tax - customer guide on discretionary trusts

HMRC Inheritance Tax - customer guide on Settled Property

Setting up a trust - get professional advice

Trust law and the taxation of trusts can be complicated and you may have to pay Inheritance Tax and/or Capital Gains Tax when putting property into the trust (although you can generally hold over the Capital Gains Tax liability). If you want to create a trust you should seek advice from a solicitor, who can also draw up the trust deed and give you advice on related legal and taxation matters. It's also advisable to speak to a tax adviser or accountant before agreeing to be a trustee as you will have responsibilities and obligations that you have to carry out under the law. You should also tell your Tax Office if you have put assets into a trust.

Find a solicitor specialising in trusts on the Law Society website

Contact your Tax Office