Setting Up a Trust in the UK – A Complete Guide
The use of a trust to protect large sums of money and other financial assets is becoming increasingly common.
The usage of trusts in the UK has risen steadily. Once thought to be the sole domain of affluent individuals seeking to dodge taxes, people from all walks of life are now taking advantage of the various benefits that a trust can provide for people wishing to protect and distribute their assets safely during their lives and after they pass away.
Trusts are complex things, however, and they come along with plenty of questions. What is a trust? How much does it cost to set up a trust in the UK? What can be put in trust? Who manages the trust? It’s important to have the right answers to these questions (and more) before you make a decision about whether a trust is right for you.
While the following is not formal legal advice (you should consult with a solicitor for that) we are going to offer a look at the basics of trusts in the UK to help you get your research started.
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What is a Trust?
As we mentioned, trusts were long thought of as the province of the ultra wealthy only. The kinds of things ‘ordinary people’ read about in novels, or the tabloids. However, a trust can be useful to all kinds of people, not just royalty or business oligarchs.
A trust is a legal entity formed by an amount of money, investments, and other financial assets (such as property) that is set away from the rest of the estate from which these assets were separated.
The person putting the assets into the trust – known as the settlor – will also provide regulations in a document called a trust deed that defines how the assets should be utilized when establishing the trust. The process of establishing a trust is an irrevocable one, which means the settlor- the person funding and establishing the trust – can’t change their mind and attempt to recover their assets at a future date.
When establishing a trust, the settlor will also name the trustees and beneficiaries who will be involved. The trustees become the legal owners of the assets once the settlor has placed them in the trust and must look after them on behalf of the beneficiaries and in line with the trust deed’s conditions. They are in charge of the trust’s day-to-day operations as well as the payment of any taxes payable.
The beneficiaries are the people that the settlor wishes to benefit from the trust’s assets in the long run. It could be a single person, a family, or another group of individuals. The beneficiaries get income or capital (or both) according to the rules laid out in the trust deed by the settlor.
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Mixed Trusts
The benefit of establishing a trust is the ability to create something completely unique and tailored to the needs of all parties concerned. Combining aspects of multiple trusts can be a highly effective method to come up with a solution that’s just right for you, but keep in mind that each element may be subject to varying tax restrictions that will need to be taken into consideration before the trust is established.
Settlor Interest Trust
In some circumstances, a settlor can create a trust that permits them to profit from it (or allow a spouse to benefit from a trust covering some previously shared assets). Typically, this type will be either a possession interest, an accumulating interest, or a discretionary trust.
UK Trusts and Inheritance Taxes
Despite the fact that some of the tax benefits of trusts have been decreased in recent years, they remain an effective vehicle for protecting family wealth. Here are just a few examples:
Capital Gains Tax
A Capital Gains Tax (CGT) charge may be imposed on the individual who gives an asset to a family member that has significantly increased in value. These charges can be greatly lowered or deferred in a tax-efficient manner if you use a trust.
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Inheritance Tax
In the United Kingdom, inheritance tax (IHT) is levied at a rate of 40% on any portion of an estate that exceeds the £325,000 threshold (unless the estate is being passed to a spouse, civil partner, or charity). For example, if the whole value of your estate is £1,000,000 (including property, other assets, and investments), £645,000 of that will be taxed at 40%, resulting in a total IHT payment of £250,000.
However, because assets placed in a trust are no longer regarded the settlor’s property, they will no longer be included in the value of the settlor’s inheritance after seven years from the establishment date of the trust (assuming the settlor has no stake in the trust).
This applies mainly to Discretionary Trusts. Settlor-Interest Trusts are usually ineffective for IHT reasons, since the Trust’s worth is included in the Settlor’s estate when they die.
Income Taxes
The first £1,000 of income received by a Bare or Discretionary Trust is usually taxed at the basic rate (20%), with the remainder being taxed at the additional rate (45 percent ).
When income is paid to a Beneficiary, it is subject to a 45 percent tax credit. If the Beneficiary only pays the basic rate of tax, they can claim a refund of any overpayment on their annual Self-Assessment tax return.
If a Trust is settlor-interested, any income generated by the Trust is taxable to the Settlor, whether or not it has been paid out. The Trustees will submit information about the income received and any taxes paid, which will be included in the Settlor’s tax return. If the Settlor pays tax at a higher rate than the Beneficiaries, there will be additional tax to pay.
The Trustees must repay the Settlor for any additional tax paid. Any tax refund obtained by the Settlor that is related to the tax paid by the Trustees must be returned to the Trustees.
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How Much Does Setting Up a Trust in The UK Cost?
Despite its reputation as a luxury reserved for the wealthy, establishing a trust is not prohibitively expensive. In most cases, a solicitor will charge approximately £1,000 to set one up. This may appear to be a large sum, but the tax savings associated with taking assets from your estate and placing them in the trust may allow you to recuperate many times that amount over the course of your lifetime.
How We Can Help
Many people who create trusts work with both a solicitor to set one up, and then an accountant going forward. Why an accountant? Most forms of trusts will be required to provide both tax and anti-money laundering information. The Trustees are responsible for gathering and maintaining current information on the Settlor, Trustees, and beneficiaries; registering the Trust with HMRC via the Trust Registration Service (TRS); and submitting annual tax returns.
We have extensive experience assisting family trusts and estates with all aspects of administration, structuring, accounting, and tax return preparation. Contact us today to discuss how we can help you.
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