A trust is set up by a settlor, who transfers assets into the trust, and these assets are then managed as a separate entity.

Key benefits of a trust

• Potential reduction in Inheritance Tax
• Control over how and when assets are distributed
• Protection for vulnerable or younger beneficiaries
• Flexibility in managing income and capital

Inheritance Tax benefits of a trust

Putting assets into a trust can provide a potential Inheritance Tax saving.

If you move an asset into a trust and survive at least seven years, the transferred asset no longer forms part of your estate for IHT purposes.

You can transfer up to your Nil Rate Band (£325,000) into a trust without paying tax on the transfer. For a married couple, this can total £650,000.

At the current 40% IHT rate, this could create a potential tax saving of up to £260,000.

What are some common types of trust?

Interest in Possession Trust

What is it?

An Interest in Possession (IIP) trust allows a beneficiary to receive income from, or use of, an asset for their lifetime, without owning the asset itself.

How it works:

• Income or use is typically given to a spouse or partner
• The asset passes to “remaindermen” after their death
• The settlor retains control over who ultimately inherits

Tax treatment:

• Income must be distributed annually (net of expenses)
• Income is taxed on the beneficiary
• Paid net of basic rate tax, with further tax due depending on their tax band

Discretionary Trust

What is it?

A discretionary trust gives trustees full control over how income and capital are distributed among beneficiaries.

When is it used?

• Supporting beneficiaries who may not be financially responsible
• Preserving funds for future events
• Allowing flexibility over distributions

Key features:

• No requirement to distribute all income annually
• Trustees decide when and how funds are paid out

Tax treatment:

• Income is taxed at 45% within the trust
• Beneficiaries receive income with a 45% tax credit
• If their personal tax rate is lower, they may reclaim tax

A useful planning opportunity is allocating income to beneficiaries with income below £12,570, where the 45% credit may be fully repayable.

Bare Trust

What is it?

A bare trust is typically used for holding assets on behalf of a minor.

Key features:

• The beneficiary has an absolute right to the assets and income
• Trustees manage the assets until the beneficiary is of age

Tax treatment:

• Income is taxed as if it belongs directly to the beneficiary

Important note:

If a parent creates a bare trust and income exceeds £100 per year, it is taxed on the parent (anti-avoidance rule). This does not apply to grandparents.

Settlor-Interested Trusts

What is it?

A settlor-interested trust is where the settlor, their spouse, or minor children benefit from the trust.

Key considerations:

There are strict anti-avoidance rules to prevent tax advantages.

Tax treatment:

• If the settlor benefits from the trust, all income is taxed on the settlor
• This applies even if income is distributed to other beneficiaries

Example:

If you transfer your home into a trust but continue living there rent-free, it becomes a Gift With Reservation of Benefit, meaning it remains part of your estate for IHT.

Trust Registration Service (TRS)

Most UK trusts must be registered with HMRC’s Trust Registration Service (TRS).

Key points:

• Registration is required for the majority of trusts
• Trustees must provide details of ownership and beneficiaries
• New trusts must typically register within 90 days of creation

What to bear in mind when considering a trust

There are several important considerations before setting up a trust.

Tax thresholds and allowances

• Trusts have a £500 income reporting allowance
• If income exceeds this, the entire amount becomes taxable
• Allowances apply once per settlor, not per trust
• Multiple trusts will split available allowances

Lifetime transfers into trust

• Transfers above the Nil Rate Band may trigger a 20% lifetime IHT charge
• Reliefs and exemptions may reduce this

Ongoing tax charges

• 10-year charges:
  Trusts may pay IHT at 0%–6% every ten years
• Exit charges:
  Applied when assets are distributed
• Charges depend on the value of assets and time since last assessment

Administrative responsibilities

• Trusts require ongoing compliance and reporting
• There are costs associated with setup and maintenance

While trusts can provide significant tax advantages, they must be structured carefully to avoid unexpected liabilities.

Frequently asked questions about trusts

Do trusts avoid Inheritance Tax?

Trusts can reduce IHT, but the outcome depends on the type of trust and how it is structured. Some transfers are immediately chargeable, while others fall outside the estate after seven years.

How much can you put into a trust tax-free?

You can typically transfer up to £325,000 (£650,000 for couples) without an immediate IHT charge.

Do trusts pay tax?

Yes. Trusts can be subject to income tax, capital gains tax, and inheritance tax depending on their structure.

Who controls a trust?

Trustees manage and control the assets, although the level of control depends on the type of trust.

Need advice on setting up a trust?

Trust planning is complex, and tax rules are subject to change. Professional advice ensures that trusts are structured correctly and tax-efficiently.

Rickard Luckin’s tax specialists can assist with:

• Selecting the most appropriate trust structure
• Minimising tax exposure
• Ensuring compliance with HMRC requirements

For tailored advice, please contact us to discuss how we can help.

Please note: This article is for general information only and does not constitute financial or legal advice. Always seek professional advice before taking action.