Understanding Trusts in 2024: A Guide for UK Residents
As accountants, TaxAgility’s priority is to help you manage your financial affairs tax effectively and ensure that your assets are protected and passed on according to your wishes. Trusts are a powerful tool in estate planning, and understanding the different types can help you make informed decisions. Whether you are looking to protect personal assets or secure the future of your business, trusts can offer significant benefits.
Key Terms
Before diving into the details, let’s clarify some essential terms:
- Settlor: The person who places assets into a trust.
- Trustee: The individual or organization responsible for managing the trust.
- Beneficiary: The person who benefits from the trust.
Types of Trusts and Their Tax Implications
1. Bare Trusts
A bare trust is a straightforward structure where the trustee holds assets on behalf of the beneficiary, who has an absolute right to the trust’s assets once they reach a specified age, typically 18.
Example: You establish a bare trust for your child, setting up an investment or savings account. All funds in this account belong to your child, who can access them fully at age 18.
Tax Implications:
- The beneficiary pays tax on the income generated by the trust.
- The standard Personal Allowance applies (£12,570 as of 2024). Income above this threshold is taxed at the following rates:
- No tax on taxable income below £12,570
- 20% on income between £12,571 and £50,270
- 40% on income between £50,271 and £150,000
- 45% on income over £150,000
How it Helps:
- Personal: This trust ensures that your child will have funds available when they reach adulthood.
- Business: If you wish to provide future support for a child involved in the business, a bare trust can help secure their financial foundation.
2. Interest in Possession Trusts
In an interest in possession trust, the beneficiary has the right to all trust income as it arises, minus any expenses.
Example: You set up a trust where your spouse receives the income generated by the trust assets during their lifetime.
Tax Implications:
- If income is mandated to the beneficiary, they include it on their Self Assessment tax return and pay the tax.
- If income is passed through the trustee, the trustee pays the tax at the following rates:
- 7.5% on dividend income
- 20% on other income
How it Helps:
- Personal: This trust provides a steady income stream for a dependent, such as a spouse, ensuring they are financially supported.
- Business: If the trust holds business shares, the income can provide financial security for your spouse while keeping the business assets intact.
3. Discretionary Trusts
Discretionary trusts provide flexibility, allowing trustees to decide how to distribute income and capital among beneficiaries.
Example: You establish a discretionary trust for future generations, including children and grandchildren who are yet to be born.
Tax Implications:
- Trustees pay tax on income received by the trust:
- 7.5% on dividend income up to £1,000; 38.1% above £1,000
- 20% on other income up to £1,000; 45% above £1,000
- The £1,000 threshold is divided if the settlor has multiple trusts. For five or more trusts, each trust has a standard rate band of £200.
- Trustees do not qualify for the £2,000 dividend allowance, meaning all dividends are taxed.
How it Helps:
- Personal: Provides flexibility to support various family members based on their needs and circumstances.
- Business: Useful for ensuring business continuity and supporting future generations involved in the business, allowing trustees to manage and allocate business assets effectively.
4. Accumulation Trusts
In an accumulation trust, trustees can accumulate income within the trust, adding it to the trust’s capital.
Example: You set up an accumulation trust for an infant beneficiary, accumulating income until they are legally entitled to receive it.
Tax Implications: Accumulation trusts are taxed similarly to discretionary trusts.
How it Helps:
- Personal: Ideal for safeguarding funds until beneficiaries are mature enough to handle them.
- Business: Helps in accumulating business profits until a successor is ready to take over, ensuring the business can grow and thrive in the interim.
5. Settlor-Interested Trusts
Settlor-interested trusts benefit the settlor or their spouse/civil partner.
Example: Due to aging concerns, you establish a discretionary trust to ensure you have funds available for future healthcare costs.
Tax Implications:
- The settlor is responsible for Income Tax, even if the income is not paid out to them.
- Trustees manage the trust and pay Income Tax on behalf of the settlor, who then reports this on their Self Assessment tax return.
How it Helps:
- Personal: Provides a financial safety net for your future needs, such as healthcare.
- Business: Ensures that your involvement in the business is financially protected, supporting you and your family if you can no longer work.
6. Mixed Trusts
Mixed trusts combine elements of more than one type of trust, and each part is treated according to its respective tax rules.
Example: You create a trust that includes both discretionary and interest in possession elements.
Tax Implications: The tax rules applicable to each part of the mixed trust are followed.
How it Helps:
- Personal: Offers comprehensive solutions to meet varied family needs.
- Business: Provides flexibility to address different aspects of business succession and family support.
Non-Resident Trusts
Non-resident trusts are set up by individuals who do not reside or are not domiciled in the UK but want to protect their UK-based assets or ensure their dependents in the UK are taken care of. These trusts can involve complex tax rules, and it’s essential to seek professional advice to navigate these complexities effectively.
Example: A non-resident settlor with children living in the UK sets up a trust to provide for their education and welfare.
How it Helps:
- Personal: Protects and manages assets for family members residing in the UK.
- Business: Ensures that business assets in the UK are managed effectively, providing for dependents and securing business interests.
Why Choose a Trust?
When you set up a trust, your objectives might include:
- Managing money for someone who cannot do so themselves.
- Safeguarding assets for future generations.
- Ensuring funds are available for healthcare and social costs.
- Reducing Inheritance Tax liability on your estate.
How We Can Help: While we at TaxAgility are not authorized to give financial advice, we can discuss the implications of various trusts within the perspective of your overall financial planning. Additionally, we can introduce you to suitable professionals for specific financial advice if needed.
- Advising on Tax Advantages: Helping you understand the tax benefits of different types of trusts.
- Transferring Assets into a Trust: Ensuring that the transfer process is smooth and tax-efficient.
- Advising on Wills: Ensuring your will is tax-efficient and aligns with your trust arrangements.
- Maximising Inheritance Tax Reliefs: Identifying and maximizing applicable reliefs and exemptions.
- Planning Lifetime Gifts: Helping you make full use of available exemptions and lower tax rates.
- Life Assurance Advice: Introducing you to professionals who can advise on adequate life assurance to mitigate inheritance tax impacts.
Contact Us
Call us today on 020 8108 0090 to discuss your situation and how a trust can match your financial needs. The first meeting is free and carries no obligation. Alternatively, use our enquiry form to get in touch.
Important Note
The Provision of Services Regulations 2009 requires us to inform you that our professional indemnity insurer is HCC International Insurance Company PLC, 35 Seething Lane, London, EC3N 4AH. Our territorial coverage is worldwide except for any professional business carried out from an office in the United States of America or Canada and excludes any action for a claim brought in any court in the United States of America or Canada.
We are not authorized financial advisers but will introduce you to suitable firms or individuals when you are considering transactions that would benefit from authorized advice. We are not regulated by the Financial Services Act and will refer you to an FSA-regulated provider if that will benefit you.
You may also like