Types of trusts

A Trust is a legal document signed between a Settlor and Trustee(s). They enable an asset to be transferred from one person to another. Trustees are entitled to certain assets as outlined in the Trust Deed, which previously belonged to the Settlor. They can use those assets to benefit a single or multiple Beneficiaries. It is essential to understand the different types of trusts, such as Bare trusts, discretionary trusts, or interest in possession trusts in the UK and their unique tax implications.

Common types of Trusts

According to the UK Government website, the main trusts are:

  • Accumulation trusts
  • Bare trusts
  • Discretionary trusts
  • Interest in possession trusts
  • Mixed trusts
  • Non-resident trusts
  • Settlor-interested trusts

Each of these trusts is taxed differently, which is worth understanding when setting up different beliefs.

Accumulation trusts

This type of trust allows the trustees to accumulate income within the trust and then add that to the trust’s capital. They can also pay payments out in some cases, much like discretionary trusts work.

Bare trusts

The assets in a bare trust are held in the trustee’s name, although the beneficiary has rights to all the capital and income within the trust at any given time, as long as they meet certain age conditions: 18 years or older in England and Wales, and 16 years or older in Scotland. The assets chosen by the Settlor always go straight to the intended beneficiary.

This is why bare trusts are typically used to pass on assets to young family members – trustees look after the assets until the beneficiaries are old enough to receive them.

Discretionary trusts

Here, the trustees make specific decisions on how the trust income, and sometimes the capital, will be used. So, depending on the trust deed document, trustees have control over several things:

  • How often will payments be made
  • Which beneficiary will receive the payments
  • Whether income or capital gets paid out
  • Any conditions which shall be imposed on the beneficiaries

Discretionary trusts are also set up to set aside assets for a future need, such as a grandchild who may require more financial assistance than others at some point. They can also be set aside for beneficiaries who need to be more responsible or capable enough to manage the money independently.

Interest in possession trusts

In these trusts, the trustee passes on all trust income to the beneficiary as it becomes available, not including any expenses.

Mixed trusts

As the term suggests, these are a combination of several trusts. The different parts of the trust are treated as per the tax laws which apply to each.

Non-resident trusts

This trust is for trustees who are not UK residents – as a result, the tax rules for non-resident trust holders can be quite complex.

Settlor-interested trusts

In this trust, the settlor or their spouse/civil partner benefits from the trust, where the trust could be a discretionary trust, an accumulation trust, or an interest in possession trust.

What are the tax implications of each trust?

The tax implications of each trust is a very broad and varied subject in its own, something which cannot be reasonably covered within one article. To better understand which trust is right for you, along with its respective tax implications, please get in touch with one of our friendly Tax Accountants   for a free initial consultation.  Further reading: UK HMRC can be found here.

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Published On: February 12th, 2023 / Views: 347 /

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