Tax

Are Trusts Still Worthwhile?

Moira McKeown Moira McKeown

Trusts definitely remain a useful structure for assets and family wealth, even despite changes to the taxation of trusts and inheritance tax over the years.  Trusts can play a useful role in succession planning and in some instances reduce inheritance tax, enabling greater value to pass to beneficiaries.

So, what exactly is a trust? A leading publication states, “Much ink has been spilt in an attempt to define a trust”.  In simple terms, it is a structure governed by a legal document called a ‘trust deed’, as a way of managing assets for other people (beneficiaries).

Many take the view that trusts only apply to wealthy individuals. This is not necessarily the case. For example, an individual could gift residential property up to the value of £325,000 into a discretionary trust, for the benefit of their children or grandchildren, without creating an immediate capital gains or inheritance tax (IHT) charge. The individual’s estate has reduced by £325,000 potentially saving IHT at 40% compared with the asset remaining in the estate at death. It is possible to transfer assets with a higher value that qualify for business property relief or agricultural property relief, such as shares in a family trading company. Any type of asset can sit in trust and can be set up during lifetime or on death via a will.

Different types of trusts exist. They include discretionary trusts, life interest trusts, charitable trusts, bare trusts and others.  A life interest trust provides the beneficiary with entitlement to the trust income during their lifetime, and the capital may pass to another on a certain event. This might be a beneficial way to provide income for a surviving spouse for life, and capital to the children thereafter. Whereas the beneficiaries of a discretionary trust will only benefit from the trust income and assets at the trustee’s discretion. The tax implications differ for each trust.

Whilst trusts can be useful for tax planning, they are also a very effective way of protecting family wealth for future generations. They allow greater control over what happens to assets after death, particularly where there are children from more than one marriage.  

Trusts have been around for centuries and the tax regime has evolved over the years. In some cases, depending on the circumstances, trust tax has become complex. However, the government are currently reviewing the taxation of trusts in our modern society. One of the aims listed in their recent consultation document is to simplify the trust administration and tax system; they recognise trusts play a valuable role.

[Source for quote at paragraph two; Trust Taxation and Estate planning by Emma Chamberlain and Chris Whitehouse, 4th Edition]