September 20, 2021

Article

Trusts have been a part of UK law long before the UK even came into existence – the popular story being that they rose to prominence during the crusades. Certainly, it was around that time that trust law as we know it today, took shape, but the concept was alive and well in Roman times - that concept being one person owning and possessing an asset, but doing so on behalf of someone else.

A modern trust takes the form of a legal owner (a ‘trustee’) and a beneficial owner (the ‘beneficiary’). The legal owner assumes all the rights of any owner of any asset, but they also assume the responsibility of a custodian and of ensuring that the beneficiary is given full use/benefit of the asset. These custodial duties are fiduciary in nature and a breach of those is a serious matter.

The person who establishes the trust is known as the ‘settlor’, they are the original owners of the asset and have passed legal ownership to the trustees. Often, the settlor will also assume the role of trustee but there will be more than one (there can be up to four trustees where land is held). The settlor may involve a professional trustee (who could be a solicitor or accountant etc); but at the end of the day, the trustees can be anyone whom the settlor can trust – the clue is in the name! Financial advisors can also be professional trustees, but usually such advisors are instead hired by the trustees for their ongoing assistance where the trust’s assets consist of financial investments.

There are several types of trusts, but the most common are ‘discretionary’ or ‘Interest in Possession’ (‘IIP’, also known as ‘Fixed Interest’ or ‘Life Tenants’) trusts. The income tax rules vary between discretionary and IIP trusts, and even then can depend on the circumstances. A discretionary trust, as the name implies, gives the trustees complete discretion over the assets – they can distribute income, capital or both or neither to the beneficiaries. There are usually multiple beneficiaries, a group (e.g. the settlor’s children) and often spread over multiple generations to include the settlor’s future grandchildren – and even great-grandchildren, as a trust can last for up to 125 years.

An IIP trust, on the other hand, tends to focus on one particular beneficiary, known as the ‘life tenant’. This life tenant has a right to benefit from the trust asset (usually the income) for the rest of their life; meanwhile the ownership and capital value of the asset remains with the trustees (who do have some discretion regarding the capital). When the life tenant dies, unless there is another life tenant or one with a successive interest, the trust will come to an end with the assets going into the ownership of a ‘remainderman’. This remainderman is usually a life tenant’s child or maybe a member of the settlor’s wider family, and that asset will become theirs absolutely.

Trusts are advantageous for both tax and non-tax reasons. For inheritance tax purposes, assets held in a trust are outside the estate of the settlor; and assets going into a trust usually pay no capital gains tax, which would otherwise be chargeable if it were a direct gift. Trusts allow assets to be used by an individual(s) but without it being in their ownership - maybe that individual is too young to own the asset, or even untrustworthy. If that individual is likely to be subject to a divorce, then assets held in trust usually avoid being subject to settlements. It’s a way of making a gift, but still keeping an element of control. It allows the family silver to be safely locked away, but for it to still be used by the intended beneficiaries.

Trusts are therefore very useful tools, not only for tax purposes, but also for succession planning and gifting. They allow all the benefits of direct gifting but give the original owner some control and peace of mind for the future, thus making them potentially invaluable. Please get in touch if you feel you or your family could benefit from creating one.

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