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Trusts may seem complicated, but they are a valuable way to retain control over your assets whilst placing them outside your ownership. The trust will allow the person who has made the gift to attach certain conditions to it. Trusts can be used as a way of managing wealth for you, your family or other beneficiaries.
Once the trust has been created, the asset is under the control of the appointed trustees. The trustees will then manage the trust according to your wishes.
Trusts can be arranged in many different ways and can specify how and when the assets pass to the beneficiaries to suit the situation.
If you are a trustee of a trust, you may need to register your trust with HMRC’s Trust Registration Service. For more details see our Trust Registration Service page.
A trust can be created in your lifetime, which is to take immediate effect (often referred to as a “lifetime settlement”), or it can be created on death through your Will (known as a “Will Trust”).
A Charitable trust can be used as a tax-efficient way of supporting a charity and leaving a lasting legacy. The trustees may only use income or capital to benefit charities or purposes that are recognised as charitable in law.
A discretionary trust gives more flexibility to the trustees and it gives them the power to decide how much beneficiaries will get from a trust and when they will receive it. A discretionary trust is helpful if you are not sure exactly how you would like your estate to be distributed. For example, if additional grandchildren are born in the future. You can name your suggested beneficiaries and then the trustees will be able to use their discretion to decide exactly how the asset is going to be distributed and to whom.
A life interest trust (also known as possession trusts or interest in possession trusts) be used for preserving assets for the next generation whilst providing a benefit for the current generation. For example, if your home is placed into a life interest trust, then the person with this interest can continue to live there until their death. The house would then be distributed in line with your Will.
A bare trust, also known as a simple trust, is one where the beneficiary has an immediate and absolute right to both the trust capital and the income received by the trust from that capital. The trustee has no discretion over the assets held. Bare trusts are commonly used to transfer assets to minors. Trustees hold the assets on trust until the beneficiary is 18 in England and Wales. At this point, beneficiaries can demand that the trustees transfer the trust fund to them.
A personal injury trust is a legally binding arrangement that allows any compensation received as a result of an accident or injury to be disregarded when the person is assessed for means-tested benefits.
A mixed trust has more of a customised approach. Often combining two or more different types of trusts.
A non-resident trust would mean that all trustees physically reside outside the U.K.
Trustees have certain legal obligations that they must fulfil and they have a fiduciary duty to act in the best interests of the beneficiaries of the trust property they are running. If the trust in question has a tax planning purpose it is especially important that the HMRC reporting requirements (including trustees meetings) are complied with as without these the trusts may be criticised at a later date.
Trustees are under a legal obligation to “exercise such care and skill as is reasonable in the circumstances”. This takes into account the fact that lay trustees may not have the skills and knowledge that a professional trustee would be expected to have. Any new trusts must be reported to HMRC for one or more of income tax, capital gains tax and inheritance tax purposes.
The legal title of assets held for the benefit of a trust should, where possible, be registered in the names of the trustees of the trust. Occasionally simply transferring the beneficial title to the trustees can be sufficient.
No matter how the trust assets are owned, they should be kept separate to any personal assets of the trustee. For example, a trust bank account should be opened in the trustees’ names if cash is going to be held.
If the assets within the trust are income producing the trustees generally have to submit an annual tax return for the income produced in the trust.
If the assets held within the trust are non-income producing (or the income produced is below specified limits) then HMRC may not require the submission of annual income tax returns. In this case, the trustees are under an obligation to inform HMRC if the income position of the trust changes.
It will also be necessary to submit tax returns if disposals are made which give rise to gains for capital gains tax purposes. These matters can be dealt with by the trustees personally, or the trustees can instruct Warners/an accountant to deal with these matters on their behalf.
The trustees may also choose to have trust accounts drawn up in relation to the trust. If capital is not distributed this can be limited to an account dealing with income only.
Depending upon the type of trust in question and the value of the trust assets, it is also possible that inheritance tax forms will need to be completed on every ten year anniversary of the creation of the trust and/or if capital disposals are made from the trust between these ten year anniversaries.
Trustees should hold regular trustee meetings. These should be held annually at the least. In addition to these annual meetings, extra meetings should take place if the trustees have decisions to make relating to the trust in between the standard annual meetings.
Agendas should be prepared prior to any such meetings and minutes should both be produced and kept throughout the lifetime of the trust.
At these meetings, the trustees should cover topics such as:
It may well be that very few changes occur within the trust from year to year, in which case the minutes would be relatively straightforward to produce each year.
If the trustees of the trust decide to make capital distributions from the trust, these decisions need to be correctly documented to satisfy HMRC that the trust has been properly managed. For example, if the trustees decide to distribute capital out to a beneficiary, a resolution and/or Deed of Appointment should be prepared reflecting both this decision and the actual transfer of funds/assets. These are matters that Warners can assist with on an ad-hoc basis at the request of the trustees.
As well as the necessity of drawing up documents when funds are distributed, it is necessary to document any other fundamental changes to the trust and its assets. An example of this would be a Deed of Appointment and/or Retirement on a change of trustees. Again this is something that Warners could assist with as and when required.
Trustees receive their powers in relation to the trust under both the relevant trust deed (usually a specific deed or a Will) and statute. The Trustee Act 2000 gives trustees the power to make any investment on behalf of the trust that they would be able to make if they were the legal owner of the trust assets. This power is, however, fettered by the trustees’ duties discussed above.
Any trustee wanting to carry out an action on behalf of the trust should be sure that they have the power to carry out that action before proceeding. This can always be checked with Warners if the trustee is in doubt.
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