A trust is a way of managing assets including money, investments, and land or buildings for individuals or a class of beneficiaries (i.e. children and grandchildren). There are different types of trusts, and they attract different tax treatments.
Why set up a trust?
Trusts are set up for various reasons, including:
to control and protect family assets
where a person is considered too young to handle their affairs
when a person cannot handle their affairs because they’re incapacitated
to pass on assets while you’re still alive
to pass on assets when you die (a ‘will trust’)
under the rules of inheritance if a person dies without a will (in England and Wales)
Who is involved in a trust?
the ‘settlor’ - the person who puts assets into a trust
the ‘trustee’ - the person who manages the trust
the ‘beneficiary’ - the person who benefits from the trust
What does the settlor do?
The settlor decides how the assets in a trust should be used - this is usually set out in a document called the ‘trust deed’. Sometimes the settlor can also benefit from the assets in a trust - this is called a ‘settlor-interested’ trust and has special tax rules.
What do trustees do?
The trustees are the legal owners of the assets held in a trust. Their role is to:
deal with the assets according to the settlor’s wishes, as set out in the trust deed or their will
manage the trust on a day-to-day basis and pay any tax due
decide how to invest or use the trust’s assets
If the trustees change, the trust can still continue, but there must always be at least one trustee, or two if the trust holds real estate.
Beneficiaries
There might be more than one beneficiary, like a whole family or defined group of people. They may benefit from:
the income of a trust only, for example from renting out a house held in a trust
the capital only, for example getting shares held in a trust when they reach a certain age
both the income and capital of the trust
Trusts and tax
There are different types of trust which are subject to Income Tax, Capital Gains Tax and Inheritance Tax in different ways. The rates and allowances vary according to the type of trust and how the beneficiaries stand to benefit from it.
