What is a Trust Fund?
Types of Trust
A trust comes into effect when a person known as a ‘settlor’ places money, land or other assets in the hands of trustees. The trustees are the legal owners of the property but are obliged to hold and manage the property for the benefit of a person or a group of people, who are called beneficiaries, in accordance with terms of the trust set out in writing (the 'Trust Deed').
Bare Trust
In this type of trust, the beneficiary has an immediate and absolute right to the property in the trust. The trustees have no discretion as to how the fund is managed. The income of these funds is taxed as if it is the income of the beneficiary (for example, wher cash/investments are held for a child until come of age at 18).
Discretionary Trust
Here the trustees have discretion over to whom and when payments should be made and also whether conditions should be attached. They are usually given discretion as to the investment of the fund. This type of fund may or may not be allowed to accumulate income. Discretionary trusts are taxed as ‘relevant property’ trusts in accordance with the Inheritance Tax Act 1984 and attract the following taxes:
- an ‘entry’ tax on lifetime transfers to the fund where the money transferred exceeds the Inheritance Tax (IHT) threshold;
- a ‘periodic’ tax, levied every ten years, on the value of trust assets which exceed the IHT threshold; and
- an exit charge if funds are withdrawn between ten year anniversaries.
In addition the trust must pay income tax on its income.
18-25 Trusts (18/25)
The settlor places money in trust for children until they reach a specified age (maximum age 25), when they become entitled to the trust fund. These are 'Relevant Property' trusts and treated like Discretionary Trusts.
Interest in Possession Trust (IIP)
Here, the beneficiary has a right to the income but not the capital of the trust fund. For example, a beneficiary may be allowed to receive the income arising from shares during their lifetime with the shares to go to their children on their death. These are 'Relevant Property' trusts and treated like Discretionary Trusts.
Trusts set up on Death
Bereaved Minors Trust ('BMT')
As set up by Will for the children of the deceased when they reach 18 years of age.
Immediate Post-Death Interests ('IPDI')
As for IIP above but are not treated like Discretionary Trusts and are not relevant property trusts. Inheritance Tax (if any) is assessed on the death of the beneficiary with the right to income.
|
|
Paul Naser
|
Trusts still have an important role to play in many circumstances. For financial and tax planning advice, contact us.
