A trust is a legal arrangement where you gift cash, property or other assets to a separate entity.
They are set up for many reasons including controlling and protecting family assets, passing on assets while you are alive, and when somebody is incapacitated or too young to handle their affairs.
Trusts enable you to detail your wishes regarding how you would like your estate to be managed so that your legacy can be distributed in a tax-efficient way.
There are many different types of trusts that can be explored, including;

• Bare trust – This gives a beneficiary absolute right to the assets and income, but the trustees are the legal owners and hold the property effectively as the nominee. Typically, used to gift to minors.
• Interest in possession trust – The beneficiary has the right to receive income, but not the capital held with the trust. The dividend-type income is taxed at 7.5 per cent and all other income is taxed at 20 per cent.
• Discretionary trust – Trustee has absolute power to decide how income and capital are distributed. The tax rate on dividend income in the trust is 38.1 per cent & non-dividend income within the trust is taxed at 45 per cent.
• Mixed trust – Combines elements of different trusts.
• Trust for a vulnerable person – Where a beneficiary is a vulnerable person (e.g. an orphaned minor or someone with a disability).
• Non-resident trust – Trustees are residents outside the UK. In this trust tax only applies to UK source income and no capital gains tax but charged on UK resident beneficiaries when they receive distributions.

One of the main benefits of a trust is that, by acting as a trustee, you would continue to maintain control over the assets gifted whilst your estate’s exposure to inheritance tax is reduced as, after seven years, the gift is generally out of the Settlor’s estate completely. Control of assets comes in two forms it may be purely investment decisions made or change in family circumstances e.g. if a child who is beneficiary of the trust and does not need the funds than the funds could be directed to siblings. Another example is funds from the trust can be directed for a specific purpose life school fees or deposit for a home etc.
Additionally, there is a tax benefit if the value of the transfer is within the nil rate band (NRB) every seven years. Also, on first spouse’s death, a trust is setup using the NRB and this has the effect of reducing the surviving spouse’s estate and inheritance tax savings if the assets grow in value between the period of the first and second death.
The assets transferred into a trust are no longer considered as belonging to the Settlor, so they are taxed according to the rules governing the trustee.
 
Protecting from Inheritance Tax
When passing on assets to a family member you must take Inheritance Tax (IHT) into account.
£325,000 of the estate of an individual can be passed to the beneficiaries free of inheritance tax and is known as the ‘nil-rate band’ (NRB). In the case of married couples and people in civil partnerships may have up to £650,000 free of Inheritance tax. Inheritance tax is due at 40% on assets above the NRB.
There are several other options worth exploring, including the additional residence nil rate band (RNRB). This was introduced in April 2017 and is an additional tax-free threshold families can tap into if they plan on leaving a residential property to their direct lineal descendants in their Wills. RNBR is tapered down by £1 per every £2 above the net estate value of £2,000,000.
Upcoming increases in the RNRB are expected to reduce IHT receipts, as, under the RNRB, married couples and people in civil partnerships will have gone up to £350,000 of IHT-free allowance per couple, but this will not be fully phased in until the 2020/21 tax year.
Individuals and families who want to explore ways of mitigating their IHT liability should investigate all of their options to determine which methods of tax planning will benefit them the most.
Alternatively, individuals can reduce the rate at which they will incur IHT on the total value of their estate by passing a portion of it to one or more charities when they pass away. By leaving 10 per cent of the net estate to charity, individuals will pay IHT at a reduced rate of 36 per cent.
 
How we can help?
It is always best to seek specialist advice to determine the right move for your situation, contact our experts today to find out how we can protect your wealth and assets.