Trusts are often mis-trusted (excuse the pun!); they are seen as being vehicles of fraud, dodgy dealings and generally something to be avoided. Whilst they could indeed be used for such ends (just as limited companies and any other structure might), trusts are more often used as a perfectly innocuous means of holding assets for other people.
What are They?
Essentially, they are formed when the legal ownership of an asset is separated from the beneficial ownership, i.e., a legal owner (the trustee) holds it ‘on trust’ for another person (the beneficiary) who benefits from it (e.g., occupies the property or receives income from it). The person who establishes (settles) the trust is the ‘settlor’ – they can do this by transferring the legal ownership from themselves to the trustee and beneficial ownership to the beneficiary, or they could simply declare themselves as trustee and pass the beneficial ownership to beneficiaries.
These trusts are known as ‘express trusts’ (i.e., those deliberately created by the settlor in the form of a deed outlining who the parties are and what assets are in the trust); such trusts can also be created by the settlor upon their death, with their will being the constituent document. ‘Implied trusts’ are those imposed by the laws of equity. Trusts now last for a maximum of 125 years.
The most common express trust is a ‘discretionary’ trust, whereby the trustees have total discretion as to the destiny of the trust asset and any income arising therefrom. Beneficiaries are often an identifiable group of people (e.g., the settlor’s grandchildren and future issue).
Another type is the interest in possession (IIP, or life tenant) trust, whereby usually a single beneficiary (the life tenant) is entitled to utilise the asset or receive the income for the rest of their life; the capital remains with the trustees, but the life tenant has the right to use it. Upon the life tenant’s death, the trust is dissolved, and the trust assets go into the absolute ownership of a ‘remainderman’.
Trusts are subject to income tax – discretionary trusts at the additional rate, and IIP trusts at the basic rate (although discretionary trust beneficiaries receive income with a refundable tax credit of 45% representing that tax paid). Trustees are subject to capital gains tax at 24% with the benefit of half an annual exemption. All trusts set up in a settlor’s lifetime are known as ‘relevant property’ trusts, which have their own inheritance tax (IHT) regime of charges every 10 years and when assets leave the trust.
Another Person for IHT
As well as facing IHT charges, trusts generally also have the same reliefs and allowances as any individual, including a nil-rate band (currently £325,000) per settlor and the benefit of agricultural and business property reliefs (albeit restricted for 100% relief purposes to £1m after April 2026). So, they are effectively another person for IHT purposes which can relieve a settlor’s estate of that value after seven years of the transfer.
CGT Reliefs
Normally, when assets are gifted from one individual to another, the resulting market value CGT charge can only be subject to holdover relief if it is a trading asset (TCGA 1992, s 165). However, if an asset is gifted into a relevant property trust, any asset (whether used in a trade or not) can benefit from holdover relief (TCGA 1992, s 260). Gifting an asset to individuals via a trust can therefore be made with no CGT payable upfront.
Keeping The Family Silver Safe
Aside from any tax considerations, trusts can be very useful by keeping assets out of the ownership of family members whose marriages might be at risk of divorce or whose trustworthiness may be questionable. Those individuals can enjoy all the benefits of owning the assets, but the asset’s actual ownership is safe in the trustees’ hands from the possible implications of divorce settlements or imprudent ownership.
Children
Minors cannot own property, so if a child is to benefit from any asset or the income, it needs to be held in a trust. Under statute, assets left to children under intestacy will be held under parental trusts.
Practical Tip
Trusts can have a variety of uses, not all of them to do with tax; they are a way of gifting assets whilst keeping legal ownership separate and allowing the donor some control. They can be used for tax planning (e.g., as another person to which assets can be transferred), but also for keeping assets safe from external influences.