Trust – or not?
Trusts are a misunderstood beast, often viewed as magic structures which mean no tax implications at all, this is far from the case.
Why would you want to create a trust? Usually, it’s because you want certain assets to go to chosen beneficiaries and a setting up a trust provides the vehicle for that. Although you can create Trusts in your Will, you can also have a Trust that is active during your lifetime.
What is a Trust?
A trust is not a separate legal entity, so it’s not like a limited company. A trust is merely a bundle of rights and obligations, where trustees hold legal title of an asset or cash in a trust bank account, on behalf of the beneficiaries and these assets must be managed in line with the trust deed and for the best interest of the beneficiaries.
People talk about ‘my Trust’, but in reality, a trust isn’t an entity, you have just settled cash or assets into a trust.
How does a Trust work?
When you settle cash or assets into a trust you are known as a settlor.
You select individuals you wish to be trustees – and ask them if they are willing to stand as trustees. You can select yourself, as the settlor, to be a trustee of a trust, if you wish.
Ownership of the cash or assets need to pass to the trustee. For assets this means a property, for instance, would need to be updated with land registry to be in the name of the trustees. Once legal ownership vests with the trustees, the asset is classed as a trust asset. The settlor’s legal ownership of the cash or asset ceases, unless of course the settlor is a trustee.
What do the trustees do?
Even though the trustee has legal ownership of the asset, they do not have beneficial ownership. In other words, they have no right to enjoy the asset, receive income from the asset, they hold this for the beneficiaries. The beneficiary has the right to enjoyment and income from the asset.
Unlike a board of directors, the trustees are entering into something more like a contract. In essence the trustees’ primary duty is to make timely distributions of trust income and assets to beneficiaries, in line with the terms of the trust.
While trustees are usually individuals, a company can be a legal trustee, and sometimes a company can be created specifically to act as a trustee for a family’s trusts. Any company acting as trustee must meet specific trust corporation criteria.
While the Settlor appoints trustees initially, it depends on the terms of the trust deed as to whether they can appoint other trustees, otherwise the trustees will decide jointly if a trustee needs to be replaced.
If a beneficiary of the trust believes it is being mismanaged, then they can apply to the Court to change the trustees.
Trusts are not tax exempt!
There are tax implications with trusts. For most trusts the value being settled into the trust by an individual cannot exceed £325,000 in a 7 year period. Any value over £325,000 settled into most types of trusts will incur a 20% entrance tax charge.
If property is included in the trust’s assets, any rental received as income is subject to income tax at 45%. Dividends received from assets, such as stocks and shares are subject to income tax at 39.35%.
Cash has no capital gains tax implications for the settlor.
If another type of asset such as shares or property are settled into a trust the settlor needs to consider capital gains tax, as transferring assets into a trust is deemed a disposal for capital gains tax purposes. The value of the assets ‘disposed’ is based on market value at date of transfer.
For assets transferred into most types of trust there is a relief called gift holdover relief, this means any capital gains tax is deferred until the asset is sold at a later date.
With most trusts, any increase in value to the assets in the trust is subject to a 10 year anniversary tax charge, and when the assets are sold, there are tax charges on this also.
Any income generated on the assets within the trust, will be taxable income for the trust. Depending on the type of trust and income type the income tax rate will vary. The trust will need to be registered with HMRC, pay the tax on the income received by the trust and submit trust tax returns each year.
You really need your eyes open when considering cash or assets being settled into a trust. It is always recommended to speak to a qualified professional to go through in detail your intention on settling cash and assets into a trust, and the various outcomes from doing this. We’d be happy to help if you’d like to discuss setting up a trust and ensuring you have all your boxes ticked to ensure your assets are properly protected.
If you have any questions about trusts, then feel free to get in touch with our expert team today and we’ll be more than happy to assist you!
