It's a matter of trust

Before I understood trusts, I was rather dubious. I thought they were complicated structures only set up for high-net-worth clients, and were either created as a tax loophole or to enable people to hide the true ownership of their property.

While this may have been applicable many years ago, in recent years many of the tax loopholes have been sewn up and trusts are more transparent, following the introduction of the Trust Registration Service (TRS).

You may then ask what are the advantages of setting up a trust and why and when would we look to use one?

In simple legal terms, a trust is a relationship where the property is controlled by one person (a trustee) for the benefit of another (a beneficiary).

The main tax benefit of a trust is that, while the assets are held in trust, as long as the settlor (the person who transferred the property into the trust) is unable to enjoy or continue to benefit from the property within the trust, then the property falls outside of their estate for inheritance tax (IHT) purposes.

While there are therefore tax advantages that can accrue to the settlor on creating a trust, the main reasons for using a trust have nothing to do with tax.

One of the main reasons we recommend using a trust is for the protection of assets - although the settlor is giving away property and is, therefore, unable to benefit from it, a trust enables them to retain control of the assets (as a trustee) and the flexibility as to who should ultimately benefit from the assets, protecting assets for the future generations.

Trusts are a particularly useful tool for grandparents. Depending on the type of trust used, the terms of the trust can enable funds to be accumulated when the beneficiaries are too young to receive the money and can then be distributed when the funds are required, say for school or university fees. The use of a trust, therefore, enables grandparents to retain control of how and when the income is taken and how it is used. It is also a very tax-efficient way of funding the education of grandchildren.

I specifically talk about grandparents here as there are tax implications if the trust is set up by parents for their minor children.

Creating trusts for appreciating assets, such as shares in newly incorporated companies or land outlined for development, can also be very tax efficient for IHT purposes as it removes the subsequent growth from the settlor’s estate.

While having a trust set up in lifetime can result in IHT charges, the IHT is subject to a different set of rules and applied at much lower rates and so can often be easier to manage. While there would inevitably be some initial professional fees for setting one up, these are normally simple arrangements, and the running costs can be relatively small compared with the overall IHT saving.

As with any other advice, our recommendations would be dependent on your particular circumstances and trusts are just one of the many tools at our disposal. Whereas a lifetime trust might be the right solution for one client or family, a family investment company might well be the better solution for another, or sometimes a combination of both. It is therefore important we understand your intentions now and for the next generations to come, in order to provide the right long-term solution for both you and your family.