Trusts & Protection

Trusts and assets held within trusts are subject to taxation. Therefore if you merely place assets into trust there is no guarantee of tax efficiency.

In general for the purposes of taxation, trusts settled by individuals during their lifetime fall into one of two categories: Absolute trust or Bare trusts; and Discretionary or Flexible trusts. A Bare Trust is where the beneficiaries are named at outset and cannot subsequently be changed.

The beneficiaries of a Bare Trust have an absolute right to access to the assets and/or income from the trust from age eighteen. A Discretionary Trust is where there are a range of potential beneficiaries defined at outset and the trustees are given the discretion to advance income and/or assets (or not) to any of the beneficiaries.

A gift to a Bare trust is a Potentially Exempt Transfer (PET) and is outside the settlor’s estate when the settlor survives for seven years from the date of the gift. If the settlor dies within seven years the PET fails.

A gift to a Discretionary Trust is a Chargeable Lifetime Transfer (CLT) and is immediately subject to an Inheritance Tax Charge of 20% on the net value of the gift that is over the balance of the Settlor’s remaining Nil Rate Band after allowing for cumulative chargeable transfers during the previous seven years. The value of the gift is outside the settlor’s estate when the settlor survives for seven years from the date of the gift. If the settlor dies within seven years there is a further Inheritance Tax charge of 20% of the original net value of the gift. When making PETs and CLTs care must be taken in their timing to maximise tax efficiency.

A discretionary trust is subject to a tax charge every ten years on the value of its assets (including previous distributions) over the nil rate band in effect on the date of the tenth anniversary. Distributions from discretionary trusts can also be subject a tax charge. However, with careful planning and timing these tax charges can often be avoided.

Income received by a trust is subject to income tax and gains within a trust are subject to capital gains tax. These taxes can often be avoided by careful selection of assets within a trust.