Three main trust structures are commonly used in estate and financial planning. Each offers a different balance of control, flexibility, and tax treatment.
Given the complexity of the UK’s tax and legal rules, professional advice is essential before choosing any trust structure. Not all UK solicitors handle the setting up of trusts, but the service is provided by many a London law firm, such as //www.forsters.co.uk, as well as a large number throughout the country.
Discretionary trust
Trustees decide when and how to distribute income or capital among a class of beneficiaries. No beneficiary has an automatic right to the assets, so the trustees can adapt distributions to changing family or tax circumstances. Because beneficiaries do not own the assets outright, those assets are often outside their estates for inheritance tax. The settlor can guide decisions through a non binding letter of wishes.
Interest in possession trust
A named beneficiary, or life tenant, gets a fixed right to receive income from, or occupy, trust property, usually for life. Trustees must pay that income to the life tenant, who is taxed on it, and on death the trust fund is normally aggregated with their estate for inheritance tax. Trustees must balance generating income with protecting capital for the ultimate beneficiaries.
Bare trust
The beneficiary is absolutely entitled to both income and capital, and, at 18, can demand the assets be transferred into their name. For tax purposes, the assets are generally treated as the beneficiary’s own, making bare trusts useful for holding assets for minors or where legal and beneficial ownership differ.
