It’s important to understand the most popular types of trust and how they work to protect assets, reduce taxes and manage tax affairs. Here are the top 7 types of trust:
- Bare Trusts: These trusts are simple and straightforward. The beneficiary receives the assets of the trust upon reaching legal age or at the discretion of the trustee. The income and gains from the trust are taxable income for the beneficiary.
- Interest in Possession Trusts (IIP): The beneficiary has the right to the income generated by the assets of the trust for a set period or for the rest of their life. The trust assets will be passed on to others after the beneficiary’s death.
- Discretionary Trusts: The trustee has control over when and how the income or assets of the trust are distributed among the beneficiaries. This provides flexibility if there are uncertain future circumstances or if the beneficiaries are not yet clear.
- Accumulation Trusts: Income earned by the trust is reinvested into the trust, rather than distributed to the beneficiaries immediately. This is useful if the trust is designed to support future beneficiaries, such as grandchildren who are still young.
- Mixed Trusts: These trusts combine elements of different trust types, suitable for complex estate planning or asset protection.
- Settlor-interested Trusts: These trusts come into play if the beneficiary is also the settlor (or creator) of the trust. The tax consequences are different and careful advice is required.
- Non-resident Trusts: If the trust is not based in the UK, it won’t be subject to UK inheritance tax regulations, but may be liable to tax in other jurisdictions. This can cause complications for UK residents who set up trusts overseas.
Trust law uses many specific terms which must be understood when dealing with trusts. Some common examples are:
- Settlor: the person who creates the trust by transferring assets to it.
- Trustee: the person who holds the property on trust for the benefit of the beneficiaries.
- Beneficiary: the person who is entitled to use or enjoy the income or assets of the trust.
Trust Taxation
Trustees are responsible for paying tax on income received by accumulation or discretionary trusts. The first £1,000 is taxed at the standard rate.
If the settlor has more than one trust, this £1,000 is divided by the number of trusts they have. However, if the settlor has set up 5 or more trusts, the standard rate band for each trust is £200.
The tax rates are below.
Trust income up to £1,000
| Type of income | Tax rate |
|---|---|
| Dividend-type income | 8.75% |
| All other income | 20% |
Trust income over £1,000
| Type of income | Tax rate |
|---|---|
| Dividend-type income | 39.35% |
| All other income | 45% |
Dividends
Trustees do not qualify for the dividend allowance. This means trustees pay tax on all dividends depending on the tax band they fall within.
Interest in possession trusts
The trustees are responsible for paying Income Tax at the rates below.
| Type of income | Income Tax rate |
|---|---|
| Dividend-type income | 8.75% |
| All other income | 20% |
Sometimes the trustees ‘mandate’ income to the beneficiary. This means it goes to them directly instead of being passed through the trustees.
If this happens, the beneficiary needs to include this on their Self Assessment tax return and pay tax on it.
There are changes to the tax of trusts coming in 2024 HMRC Trusts and Estates Newsletter: April 2023 – GOV.UK (www.gov.uk)
Capital Gains Tax
For the 2023 to 2024 tax year, the tax-free allowance for trusts is:
- £3,000
- £6,000 if the beneficiary is vulnerable – a disabled person or a child whose parent has died
10 Year Charge
There are other charges that can be applied to trusts including the 10 year charge Trusts and Inheritance Tax – GOV.UK (www.gov.uk)
Our Expert
We have our own expert – Claire Forth ACMA CTA – if you need help with Trusts please get in touch
We recommend Bonallack & Bishop Solicitors for the legal work.
steve@bicknells.net
