What are Trusts and should you consider setting one up?

There are many aspects you should consider when deciding if a Trust is right for you.

In this article we look at some of the key reasons for setting up a Trust, the tax/accounting implications and how an accountant can assist you.

What is a Trust?

Simply put, a Trust is legal arrangement where one or more ‘Trustees’ are made legally responsible for holding assets. The assets – such as land, money, buildings, shares or even antiques – are placed in Trust for the benefit of one or more ‘beneficiaries’, typically a child, spouse, relative or charity institution.

The Trustees are then responsible for managing the Trust and carrying out the wishes of the person who has put the assets into Trust (the ‘settlor’). The settlor’s wishes for the Trust are usually written in their will or set out in a legal document called ‘the Trust Deed’.

Why set up a Trust?

Putting assets into Trusts can in some cases reduce or even eliminate the Inheritance Tax liability for that asset and it can also help to keep the value of the Estate within the nil-rate band. However, tax efficiency is not the only driving factor behind the creation of new Trusts, they can help control and protect family assets.

Trusts may be set up for a number of reasons, for example:

• To hold assets when someone is too young to handle their affairs or incapacitated. For example, on behalf of a child until they reach the age of 18. This will allow for the property or money to be properly managed until the children are old enough legally to take their possession. Some types of Trust allow the beneficiary to receive an income from the property.
• To pass on money while you are still alive
• To provide for a spouse while keeping the Estate intact to be passed down to children.
• To protect the family home from being sold in order to pay for residential care.
• To pass on money or assets when you die under the terms of your Will – known as a ‘Will Trust’.
• Under the rules of inheritance that apply when someone dies without leaving a valid Will (England and Wales only)

What types of Trusts can I choose from?

There are several types of UK family Trusts and each type of Trust may be taxed differently. There are other types of ‘non-family’ Trusts. These are set up for many reasons. For example, to operate as a charity, or to provide a means for employers to create a pension scheme for their staff. We can advise on which type of Trust is right for you.

What are the accounting and tax obligations for a Trust?

The Trustees have a duty to declare any taxable income and gains to HMRC by completing Trust and Estate Tax Returns under the Self-Assessment system. HMRC’s tax requirements and penalties apply equally to Trustees and individuals.

The Trustees have a duty to keep true and accurate accounts of all transactions for which they are responsible as trustees. The Trust accounts do not have to take a particular form but they must include a record of all receipts and payments, and be supported by vouchers.

Beneficiaries are entitled to examine the accounts and the Trustees must ensure these are available for inspection at any time. The accounts may be audited up to once every three years (unless the Trust Deed provides otherwise), although in practice this is very uncommon for a private Trust.