Trusts can offer efficient solutions to distributing wealth as part of wealth and succession planning and in some cases be effective in reducing both capital gains tax and inheritance tax. In other cases, they can allow income to be paid tax efficiently to certain family members, reducing the overall tax burden on families.
Whilst the pure tax benefits of the use of trusts have been considerably reduced in recent years for UK residents and domiciled individuals, trusts can still have a vital role as part of a holistic succession planning strategy. Trusts can also still offer substantial tax benefits for non-resident and non-domiciled individuals who are considering relocating to the UK and have substantial assets outside the UK. In these cases it is vital to plan in advance of a move to the UK, so please get in touch with us as early as possible.
The financial administration of trusts and estates can be a complex and time-consuming affair. Whether you are a professional trustee acting for a client or acting in a personal capacity, we can assist.
Our trust team are tax specialists who navigate you through the complexities of tax and succession planning, which may involve the use of trusts and/or other arrangements such as family investment companies, advising on the most tax-efficient way to arrange your affairs, based on your own personal circumstances.
We can also assist with all aspects of trust administration including preparing annual accounts and trust Self Assessment Tax Returns.
Trusts can also be of benefit when considering the handing down of shares in family companies. We can advise on flexible arrangements to ensure your business ends up where you want it to.
Trusts can often contain shares in unquoted companies which require valuing for probate and other purposes, for example, 10-year anniversary charges for IHT. We have experience in preparing such valuations and in negotiating with the Shares Valuation Division of HMRC.
Trusts and Estates for wealth planning
Trusts are a useful tool for preserving existing wealth in a family and increasing wealth in a tax-efficient manner. Where appropriate to use, trusts offer tax-efficient ways to allow assets to be transferred, in a secure and flexible manner. With a trust structure, you can ensure that only those you wish to benefit from your estate do and you can maintain control on how and when assets and revenue is paid. This is particularly useful if you wish to protect against the uncertainties of divorce, protection from creditors, or if you have more complex family arrangements.
Understanding the most appropriate type of trust to utilise, setting this up and dealing with the wide-ranging tax issues surrounding trusts and estates can be a complex affair. Alexander & Co has a team of tax experts that can assist you, maximising the tax planning benefits based upon your needs.
What are the types of trusts available?
A trust can be structured in a number of ways, and each type of trust has different characteristics and benefits. The most appropriate type of trust to utilise will depend upon personal circumstances.
Bare trusts are a form of a trust where one individual, the trustee, holds assets for another person, the beneficiary. Essentially the trustee has legal title to the assets but the beneficiary has the right to the assets, being entitled to all the income and capital.
These are sometimes seen where the beneficiary is a child or young person and a family member will hold assets as trustee until the beneficiary reaches a certain age.
They also occur in business scenarios, for example where one partner in a partnership holds legal title to an asset, holding in on bare trust for the partnership/all of the partners.
Interest in Possession or Life Interest Trusts
Interest in possession trusts are those where the beneficiary, known as the life tenant, has an entitlement to the income of the trust as it arises. The life tenant will be entitled to the income from the trust for their lifetime. The life tenant does not however have any entitlement to the capital assets of the trust (although in some cases the trustees may be able to advance capital to them).
The trust deed will then also provide what will happen to the capital of the trust on the death of the life tenant. This could be to create a new life interest for a younger life tenant, or in most cases to provide that the capital will go to another beneficiary(ies) – legally known as the remaindermen.
An example of this is where on the death of one spouse, their share in their family home is left in trust with the life tenant being the surviving spouse and remaindermen being their children.
The surviving spouse will have the right to occupy the property during their lifetime (and receive any income from the property which may arise). On their death the property passes to the children.
Discretionary trusts are those in which no beneficiaries have any fixed entitlement to either capital or income from the trust. Generally, the trust is created with a “class” of beneficiaries who may benefit. For example, “the children (over 18 years of age) and grandchildren of the settlor”. The trustees will have the discretion to make payments of income and/or capital to any of the beneficiaries within the class or classes of beneficiaries.
Examples of where discretionary trusts could be useful include providing for someone who is not capable or responsible enough to make decisions themselves, or where a future need is to be provided for, such as financial support for children or grandchildren, such as school fees or a mortgage deposit.
Employee Ownership Trusts
The Employee Ownership Trust provides a form of employee ownership where a trust holds the controlling stake in a company on behalf of all the company’s employees. It is an extension of the traditional employee benefit trust, providing additional benefits and tax advantages. This structure provides a tax incentive for company owners to sell the controlling stake in their firm to their employees.
Employee Ownership Trusts and the very generous tax advantages which are available for their creation were first introduced in the Finance Act 2014. The aim of the Government at the time was to encourage employee ownership in the UK. This structure provides a generous tax incentive for company owners to sell the controlling stake in their firm to their employees, as opposed to a third party. These tax advantages include generous capital gains and IHT incentives on the sale, together with additional income tax exemption on certain bonuses paid to all employees on an ongoing basis.
Many companies have already transitioned to employee ownership, and this could be a very viable alternative to a third-party sale for business owners who have built up a business but have no succession plan within the family, for example, if their children have forged other careers and do not wish to carry on the business.
We can advise on the establishment and structure of such trusts, advising the existing shareholder, and dealing with ongoing tax compliance and advice.
A charitable trust (or foundation) is one where the trustees may only use income or capital to benefit purposes that are recognised as charitable in UK law. Typically, these would need to be UK registered charities.
Trusts can be created by an individual during their lifetime (inter vivos), but also in their will.
A will trust is one that is created by an individual in their will, which provides for assets to be passed into a trust on their death. Similar to trusts created during a lifetime, these can create different types of trust depending upon the requirements of the testator, for example, life interest trusts and/or discretionary trusts.
Where a trust is created for children in a will of a parent who dies whilst the children are minors and the terms of which provide that they will become absolutely entitled to the trust property when they reach age 18, this has a beneficial tax status and is known as a Trust for Bereaved Minors.
Not strictly types of trust, but more classification for tax purposes, we regularly also advise on the following:
A Settlor-interested trust is one in which the settler (or their spouse/civil partner and any of their children who are under 18 years of age) can benefit from the trust.
Care needs to be taken when creating such a trust as any income arising within the trust is likely to be taxed in full on the settlor (whether or not they take the income). Also for IHT purposes, the settlement could be classified as a gift with reservation since the settlor can still benefit. This would mean that the value of the trust assets would be deemed to form part of the estate of the settlor for IHT purposes on their death, and also fall within the relevant property regime within the trust. This can lead to double taxation.
We strongly recommend that our advice is sought prior to creating a trust where the settlor retains any form of benefit. The tax costs of getting this wrong can be substantial, so understanding the position in advance and planning accordingly is vital.
Non-UK Resident Trusts
The residence position of a trust is determined primarily by where the trustees (as a body, where they are individuals) are located.
A trust will be considered Non-resident where the trustees are not residents in the UK for tax purposes. This will also apply when at least one of the trustees is not resident in the UK and the settlor was either a non-UK resident or non-UK domiciled when the trust was created.
The tax rules for non-resident trusts are very complicated and will depend upon several factors, including the individual residence and domicile of the beneficiaries and the settler. It is strongly recommended that a UK beneficiary of a non-resident trust seek advice from specialist advisors like Alexander & Co to ensure they understand their tax obligations. This may also involve ensuring that the trustees who are non-resident take action to ensure segregation of income and capital and keep adequate records as to the nature of any amounts distributed to the UK beneficiary.
Tax advice on trusts and estate planning from our specialist team
Our expert tax team has in-depth knowledge relating to trusts and estates, having experience across all trust types for both individuals and businesses, including non-resident trusts and setting up trusts for both high net-worth individuals and non-domiciled individuals and companies.
We can provide guidance on where a trust may provide beneficial and assist in establishing trusts, provide guidance on the tax complexities surrounding trusts and deal with all compliance matters, all in a cost-effective manner.
How we can help you
Alexander & Co provides a wider range of wealth protection, inheritance tax and succession planning advice, including the setting up of trusts in the most effective manner, through to the preparation of trust and estate accounts and returns.
Services frequently provided to our trust clients include:
- Preparation of trust and estate Self Assessment Tax Returns
- Finalising of a deceased’s tax affairs to date of death
- Preparation of statements of estate income and completion of forms R185 for estate income distributions to beneficiaries, during the administration period and for trust beneficiaries
- Calculating the inheritance tax position on trusts and estates. The completion of any necessary inheritance tax forms and agreeing with HMRC any liabilities
- Capital Gains Tax Planning for estate and trust beneficiaries
- Active estate planning to minimise future inheritance tax liabilities
- Preparation of trust and estate accounts, including interim accounts, where required
Contact one of our specialist trust accountants today to find out how we can assist you.
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