In the landscape of wealth protection and estate planning, trusts remain an effective and flexible structure. Whilst they are powerful tools, they require careful planning and a clear understanding of their tax implications. Head of Private Wealth Rhea Rhugani explains more.

Why Use a Trust?

1. Asset Protection Trusts can protect wealth from divorce, creditors, or prevents mismanagement of funds. They can also be used to offer assistance in mitigating potential care fees.

2. Control Over Distribution Settlors can specify how and when beneficiaries benefit. This can be particularly useful for young, vulnerable, or financially inexperienced individuals.

3. Succession and Estate Planning Trusts facilitate smooth generational wealth transfer and can be used to mitigate Inheritance Tax exposure. They can provide security for the family and for future generations.

4. Confidentiality Unlike wills, trusts generally remain private.

5. Tax Planning With careful planning, trusts can help manage IHT exposure and preserve family wealth across generations.

Types of Trusts:

–          Bare Trust: These are essentially nominee arrangements where assets are held for an individual who are absolutely entitled to those assets.

–          Discretionary Trusts: This gives power to Trustees who have full discretion over how the assets are distributed to the beneficiaries. This is a flexible mechanism which can be adapted according to changing circumstances.

–          Interest in possession trusts: These grant a right for the beneficiary to receive income over a prescribed period of time, generally over a lifetime.

UK Tax Implications:

Whilst trusts can be a useful tool, the tax implications must be considered on each occasion. For example, with regard to Inheritance Tax, under a Discretionary trust there is a 20% entry charge above the nil-rate band and 10-year anniversary charges of up to 5%.  In the case of an Interest in Possession trust, the life tenant’s estate is tax on the value of the trust.

Other Points:

• Bare trusts: Transparent for tax purposes – income and gains taxed on beneficiary.
• TRS compliance: All UK express trusts must be registered with HMRC.

Points to note

• Review your objectives: Not all trusts are tax-efficient. Choose a structure that fits your goals—asset protection, control, succession, etc.
• Watch IHT thresholds: Gifting into trust may trigger immediate IHT if above the nil-rate band.
• Plan for tax charges: Trusts face periodic IHT and high-income tax rates. Ensure the trust has liquidity to meet liabilities.
• Document everything: Keep clear records, trustee minutes, and beneficiary communications.
• Register with HMRC: Ensure compliance with the Trust Registration Service (TRS).

Trusts are not “one size fits all.” When used correctly, they offer substantial legal and financial advantages. But poor structuring or misunderstanding the tax rules can lead to unnecessary costs and compliance risks. Always seek tailored legal and tax advice before establishing or altering a trust.

The information contained in this article is general guidance only. The application and impact of laws can vary widely depending on the specific facts involved. The information in this article is provided with the understanding that the authors and presenters are not giving legal, tax, or other professional advice and services. As such, it should not be used as a substitute for consultation with professional legal, tax or other competent advisers. Before making any decision or taking any action, you should consult a Child & Child professional.