tax & trusts

A trust is a legal arrangement where you give money, property or investments to someone else so they can look after them for the benefit of a third person.

There are two important roles in any trust that you should understand:

  • The trustee is the person who owns the assets in the trust. They have the same powers a person would have to buy, sell and invest their own property. It’s the trustees’ job to run the trust and manage the trust property responsibly.

  • The beneficiary is the person who the trust is set up for and is usually unable to manage the trust assets for themselves because they are too young or they are not good at managing their own money. The assets held in trust are held for the beneficiary’s benefit.

what types of trust are there?

The kind of trust you choose depends on what you want it to do. Here are some of the most common options:
Mother and a Child
Bare trust

This is the simplest kind of trust. It gives everything to the beneficiary straight away, as long as they're over 18.​

Interest in possession trust

The beneficiary can get income from the trust straight away, but doesn't have a right to the cash, property or investments that generate income. The beneficiary will need to pay income tax on the income received. You could set up this kind of trust for your partner, with the understanding that when they die the investments in the trust will pass to your children. This is a popular trust structure used in the will of a person who remarries after divorce, but has children from the first marriage.

Rings on Hands
Golf with Grandpa
Discretionary trust

The trustees have absolute power to decide how the assets in the trust are distributed. You could set up this kind of trust for your grandchildren and leave it to the trustees (who could be the grandchildren's parents) to decide how to divide the income and capital between the grandchildren. The trustees will have the power to make investment decisions on behalf of the trust.

what does a trust do?

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  • When you put something into a trust, it no loner belongs to you- instead the money, investments or property belong to the trust. This means that when you die their value normally won’t be counted when your Inheritance Tax bill is worked out. 

  • Another potential advantage is that a trust is a way of keeping control and asset protection for the beneficiary; a trust avoids handing over valuable property, cash or investment whilst the beneficiaries are relatively young or vulnerable. The trustees have a legal duty to look after and manage the trust assets for the person who will benefit from the trust in the end.

  • When you set up a trust you decide the rules about how it’s managed. For example, you could say that your children will only get access to their trust when they turn 25.

Mixed trust

Combines elements from different kinds of trusts. For example, a beneficiary might have an interest in possession (for example, the right to income) of half of the trust fund. The remaining half of the trust fund could be held on discretionary trust.

Dollar Bill in Jar