Trusts in the UK: How They Work and When to Use Them

Trusts in the UK: How They Work and When to Use Them

Trusts are legal arrangements that allow assets to be managed by trustees for the benefit of others. In England and Wales, trusts are often used for estate planning, asset protection, and managing tax liabilities. They can offer flexibility and control over how and when assets are passed on, making them a valuable tool for many families.

What is a Trust?

A trust is built around three key roles. The settlor is the person who creates the trust and transfers assets into it. Trustees are appointed to manage those assets according to the terms of the trust. Beneficiaries are the people who will benefit from the trust, either now or in the future.

Common Types of Trusts

There are several types of trusts, each serving different purposes. Bare trusts are the simplest, giving beneficiaries an absolute right to the assets. Interest in possession trusts allow beneficiaries to receive income from the trust, but not the capital itself. Discretionary trusts give trustees the power to decide how and when to distribute income or capital among a group of beneficiaries. Will trusts are set up in a will and only come into effect after death.

When to Use Trusts

Trusts can be especially useful if you want to protect assets for young beneficiaries until they reach a certain age, or to provide for someone who is vulnerable or has a disability without affecting their entitlement to benefits. They are also used for tax planning, as certain trusts can help reduce Inheritance Tax liability, and for asset protection, such as shielding assets from divorce or bankruptcy.

Trust Taxation

Trusts are subject to their own tax rules, including income tax, capital gains tax, and inheritance tax. The rates and rules can be quite different from those that apply to individuals, so it’s important to understand the implications before setting up a trust.

Setting Up a Trust

To create a trust, you’ll need a trust deed—a legal document that sets out the terms of the trust and the powers of the trustees. Choosing the right trustees is vital, as they will be responsible for managing the trust in line with your wishes. Because trusts can be complicated, especially when it comes to tax, careful planning and ongoing management are essential.

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Disclaimer: This blog post provides general information for educational purposes only. It is not legal advice. Outcomes can vary based on your personal circumstances.