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What is a Trust?

A trust allows a person to put assets such as money, investments, land, property in the hands of a trustee or group of trustees. The individual who sets up the trust can line out their intentions via a legal document called a trust deed or via their will.

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How does it Work?

A trustee (or trustees) manage the trust on behalf of the settler (the person who has put the assets into the trust). The trustees are legally responsible for the assets and the trust can be made for one or more individuals known as the beneficiaries.

You can choose from a range of trusts depending on what you want and who your beneficiaries are from those which are for people under the age of 18 or are disabled, to discretionary and possession trusts.

You can also use a family trust via your will, to pass assets into once the estate is final.

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Types of Trusts

There are many types of trust, each with their own tax implications therefore it is highly recommended that you discuss your options with a financial adviser.

  • Bare Trusts

Bare trusts give the beneficiary an immediate right to income and capital.

  • Discretionary/Accumulation Trusts

Trustees for a discretionary trust can choose whether to pay out the income of the trust, whereas for an accumulation trust they can re-invest the income.

  • Interest in possession Trusts

With this type of trust, the beneficiary has a right to all of the income.

  • Settlor-Interested Trusts

In this type of trust, the settler (the person who created the trust) can carry on benefiting from the assets within it.

  • Parental Trusts

These trusts are set up for children under the age of 18.

  • Heritage/Charitable Trusts

Heritage trusts are set up to maintain historic buildings while charitable trusts are set up for a cause or organization that helps a group of people or society. Extra tax benefits are connected to charitable trusts because they are set up for the benefit of the public.

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What are the Tax Implications?

Trusts and the topic of tax is a notoriously complex subject. For this reason, it is highly recommended to seek independent financial advice or to go straight to a solicitor, in order to make sure that the settler, trustees and beneficiaries are all clear. Here are some basics:

  • Capital Gains Tax (CGT)

Capital Gains tax is generally a factor and is usually payable by the trustees. However, the rate and details of this will depend on the terms of the trust. For example, an Interest in Possession Trust will incur a flat 20% rate on rent, savings and trading income. Dividends will be subject to 10%. However, a Discretionary Trust will be taxed on the first 1,000 of income yet after that dividends are charged 32.5% and other income will incur 40%. Please note: these rates can change.

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What are the Benefits of a Trust?

A trust depending on its type can benefit a person, group of people or cause in a number of ways. For minors (under the age of 18), money can be set aside until they are ready to manage it themselves. This money can grow and accumulate over time through investments (such as stocks and shares) or from regular contributions. A person might set up a trust to ensure that their estate is managed correctly after they die, meaning a trust can give a source of security.

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Are there and Disadvantages of Trusts?

Trusts are fairly complex because there are so many types and because the tax rules alter according to each type. Not only that, but tax rates can change on a regular basis.

Therefore, starting a trust requires a good amount of patience, time and a good financial service to help you set this up. This could be in the form of a solicitor or an independent trust provider.

If you use a trust for investment, you should be aware that the value of the investments can go down due to the fluctuations of the financial market.


Please Note: is not authorised to give advice under the Financial Services and Markets Act 2000.

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