Posted: 12 / 04 / 2024

What is the purpose of a trust?

Trusts are set up for a variety of reasons, including:

  • to control or protect family assets
  • to look after assets or investments for minor children
  • to look after assets or investments for people wo are incapacitated
  • to pass on assets during a person’s lifetime
  • to pass on assets when someone dies (will trust’)
  • a trust can be created under the rules of inheritance if someone dies without a will (in England and Wales)

Separate Entity

It is important to understand, and this is something that is often misunderstood, that once assets or investments are placed into a trust, they belong to the trustees of the Trust – they no longer belong to the person who placed them in trust (the Settlor) and they do not (except in the case of a bare trust) automatically belong to the beneficiaries of the trust.

Too often we have seen families not really understand this point, possibly due to inadequate advice when the trust was created. As a result, they continue to treat the asset or investment as being available to the family to do with as they please, perhaps spending the income generated or even selling the asset or investment and pocketing the proceeds with no thought to the reporting requirements and tax consequences of this.

This can lead to unexpected tax liabilities, often when there is no cash available to meet them, and expensive remedial work to correct matters.

Setting Up a Trust

The key to getting things right with a Trust is to start at the beginning. Make sure that the appropriate Tax and Legal advice is sought and that you fully understand what is happening and what you will be able to do going forward.

Settling assets or investments into trust will have tax consequences for the settlor. Even where there is no tax to pay, either because the amounts are below taxable thresholds or because a particular tax relief is being relied on to make the transfer exempt, there will inevitably still be a requirement for a disclosure to the tax authorities.

Where a tax relief is being relied on, it is important that this is looked at very carefully to ensure that the conditions are properly met. For instance, a common relief claimed is Business Relief which can exempt certain business assets from Inheritance Tax. This relief has complex conditions which need to be looked at very carefully by someone who fully understands the tax legislation. It is very easy to assume that a business is a qualifying trading business based on its main business activity. However, a more detailed look behind the scenes can often reveal that the business does not meet all the necessary conditions and the relief may be denied – which could result in an immediate and unexpected charge to inheritance tax.

Ongoing Consequences

The Trust will need to be registered with HMRC and the trustees will have ongoing legal and tax responsibilities which cannot be ignored. There will be regular tax reporting requirements and the trustees will need to consider their legal responsibilities before taking any decisions which affect the assets and investments under their control.

The trust will also need to be entered on the ‘Trust Register which is separate to the tax registration and is basically a list which records all the interested parties of a trust.

Transferring Money or Assets Out of a Trust

It is of course possible to change or sell assets within a trust or to pass money or assets out of the Trust to the beneficiaries, but this must be done in a certain way and will have tax consequences which will need to be reported by both the trustees and the beneficiaries.

Our recommendation

Our recommendation is that where you are considering setting up a Trust (or where someone is recommending that you do so), you take appropriate advice from both a Solicitor and a Tax Expert (often separately). This is to ensure that you fully understand why the Trust is relevant, what the immediate tax consequences are and what the ongoing tax and legal consequences will be.

Once the Trust has been created, we would suggest that a suitable tax professional be appointed to deal with the ongoing compliance and reporting responsibilities and that suitable tax and legal advice is sought before any subsequent changes are made to the trust or its assets.

If you are considering setting up a Trust, or if you already have one and need help with any issues, do please feel free to contact us.

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David Evans
Head of Private Clients

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Sarah Richards
National Head of Tax

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Adam Jones
Senior Tax Manager – Advisory

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Graham Marsh
Personal Tax Manager

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