Trusts

What are trusts?

Trusts are a long established mechanism which allow individuals to benefit from the assets whilst others (the trustees) have the legal ownership and day to day control over the assets. A trust can be extremely flexible and have an existence totally independent of the person who established it and those who benefit from it.

A person who transfers property into a trust is called a settlor (or truster in Scotland). Persons who enjoy income or capital from a trust are called beneficiaries. Though not very common with English trusts, it is possible for the settlor to appoint a protector, an independent person who oversees the administration of the trust.

Trusts are separate persons for UK tax purposes and have specific rules for all the main taxes. There are also a range of anti-avoidance measures aimed at preventing exploitation of potential tax benefits.

Trust Registration Service

The Trust Registration Service (‘TRS’) requires all trusts and ‘complex estates’ (broadly those with a value of more than £2.5m or involving a capital sale with proceeds of more than £500,000) to be registered centrally. In addition to this the trust must update the register every year when there has been a taxable event. The most common instance of this will be the submission of annual income tax returns to be completed by 31 January following the relevant tax year; the TRS register must be updated by the same deadline. However, it is not just the imposition of annual income tax liabilities which necessitates an annual TRS update, any liability of any tax (including IHT and SDLT) will require the TRS to be updated.

Taxable trusts are now required to provide additional data to confirm if:

• the trust is, or is not, an express Trust
• a non-UK trust has a business relationship in the UK
• the trust has purchased any UK land or property
• the trust has a controlling interest in a non-European Economic Area (EEA) company (and if so, provide company details).

They will also have to supply additional data about the individuals involved in the trust. Information must also be provided about:

• country of residence
• country of nationality
• whether the person has mental capacity at the time of registration.

Non-taxable trusts

HMRC has also started to allow non-taxable trusts to register and make changes to their trust details. Use of the service is only currently available on a limited basis to allow for service development and enhancement, so will only be accessible to those who have been invited to use the service.

The TRS is available via www.gov.uk/trusts-taxes/trustees-tax-responsibilities

Types of trusts

There are two basic types of trust in regular use for individual beneficiaries:

• life interest trusts (sometimes referred to as interest in possession trusts and in Scotland known as life renter trusts)
• discretionary trusts.

Inheritance tax consequences

Importance of 22 March 2006

Major changes were made in the IHT regime for trusts with effect from 22 March 2006. The old distinction between the tax treatment of discretionary and life interest trusts was swept away. The approach now is to identify trusts which fall in the so-called 'relevant property' regime and those which do not.

Relevant property trusts

Trusts which fall in the relevant property regime are:

• all discretionary trusts whenever created
• all life interest trusts created in the settlor's lifetime after 22 March 2006
• any life interest trust created before 22 March 2006 where a beneficiary changes after 6 October 2008. A key exception exists where a change occurs after 6 October 2008 on the death of a life tenant but the new life tenant is their spouse.

If a relevant property trust is set up in the settlor's lifetime, this may give rise to an immediate charge to inheritance tax at the lifetime rate of 20%. If the value of the gift (and certain earlier gifts) is below £325,000 or is covered by an IHT relief then no tax is payable. Trusts set up under a will attract the normal inheritance tax charge at the death rate of 40% (after reliefs and the nil rate band where available).

Relevant property trusts are charged to tax every ten years (known as the periodic charge) at a maximum rate of 6% of the value of the assets on each tenth anniversary of the setting up of the trust. A fair prorate charge of less than 6% (and often much lower) is also made if assets are appointed out of the trust known as an ‘exit charge’.

Benefits of a relevant property trust

Whilst the inheritance tax charges do not look attractive, the relevant property trust has a significant benefit in that no tax charge will arise when a beneficiary dies because the assets in the trust do not form part of a beneficiary's estate for IHT purposes. There can be significant long-term IHT advantages in using such trusts.

Trusts which are not relevant property

Within this group are:

• life interest trusts created before 22 March 2006 where the pre-2006 beneficiaries remain in place or were changed before 6 October 2008 or where a second spouse has taken over the life interest on the death of the first spouse
• the trust was created after 22 March 2006 under the terms of a will and gives an immediate interest (cannot be replaced by another) in the income to a beneficiary and the trust is neither a bereaved minor’s nor a disabled person’s trust; or
• the trust is created in the settlor's lifetime or on death for a disabled person.

For pre-22 March 2006, lifetime transfers into a life interest trust, the gift would have been a potentially exempt transfer (PET) and no inheritance tax would have been payable if the settlor survived for seven years. Transfers into a trust on death would be chargeable unless the life tenant was the spouse of the settlor. There is no periodic charge on such trusts. There will be a charge when the life tenant dies because the value of the assets in the trust in which they have an interest has to be included in the value of their own 'settled estate' for IHT purposes.

Could I use a trust?

Trusts can be used in a variety of situations both to save tax and also to achieve other benefits for the family. Particular benefits are as follows:

• If you transfer assets into a trust in your lifetime you can remove the assets from your estate but could act as trustee so that you retain control over the assets (always remembering that they must be used for the beneficiaries).
• A transfer of family company shares into a trust in lifetime (or on death) can be a way of ensuring that the valuable business property relief is utilised.
• By putting assets into a trust you can give the beneficiary the income from the asset without actually giving them the asset which could be important if the beneficiary is likely to spend the capital or the capital could be at risk from predators such as a divorced spouse.
• Trusts (particularly discretionary trusts) can give great flexibility in directing benefit for different members of the family without incurring significant tax charges.
• If you want to make some IHT transfers in your lifetime but are not sure who you would like to benefit from them, a transfer to a discretionary trust can enable you to reduce your estate and leave the trustees to decide how to make the transfers in later years. It also means that the assets transferred do not now hit the estates of the beneficiaries.

Trust Registration Service

This is an important recent digital administration development, which came about due to Money Laundering Regulations which require countries to have a national register of certain information to fight against money laundering and terrorist financing.

Since 2020, The Trust Registration Service ('TRS') requires all UK non - taxable 'express' trusts (and certain additional non-UK trusts - not considered further here) to register. An express trust is one which is created deliberately by an individual in writing for specific purposes rather than being created by an act of law which is a non express trust. Common examples include but are not restricted to interest in possession and discretionary trusts. Non express trusts include trusts established by a Court or by legislation and provided there is no tax liability are not required to register.

The deadline for registration of new trusts or where changes determine that a trust needs to register is 90 days from creation. Trusts on the register have to be updated whenever there are certain changes, such as a change in the lead trustee. These changes will also have a 90 day action deadline.

HMRC have published a manual to assist taxpayers - the Trust Registration Service Manual - HMRC internal manual - GOV.UK