Setting up a Trust

The definitive guide to setting up a trust in England & Wales

What is a trust?

There are lots of different names when it comes to Trusts but they all do a similar thing.

Trusts help you maintain some control over how your money is used, even for many years after your death.

You can create a Trust as part of your Will – so when you are making out your Will speak to your adviser about your concerns.

They will be able to advise you on the best course of action to ensure your money stays within the family as you wish.

How do trusts work?

If you place your money in a trust it is controlled by the people you choose (the trustees) on behalf of the person, or people, you wish to benefit (the beneficiaries).

By law, the trustees must administer the trust’s money in accordance with the rules you specified when setting the trust up.  

Why set up a trust?

A trust stops your money or assets being misspent or lost after you die.

For example:

·        If your partner remarries there is a danger of your wealth passing to the new spouse rather than your children. A trust keeps it in the family.

·        If you are leaving money to a vulnerable person, the trust makes sure they have everything they need whilst stopping them from misspending or being taken advantage of.

·        A business owner can place their share of a company in a trust to keep it benefiting their family after they die.

Trusts can also be highly tax efficient in certain circumstances.

How are trusts taxed in England & Wales?

Are trust funds taxed?

Lifetime Trusts are charged Inheritance Tax (IHT).

In most cases, when you set up your trust you will be charged 20% IHT on everything over your nil-rate band tax allowance.

The nil-rate band tax allowance currently stands at £325,000 for an individual and £650,000 for married couples.

This means that if the trust is worth £500,000 and you set it up as an individual, you will pay 20% tax on the remaining £175,000. This would be £35,000.

You will then be charged 6% IHT every 10 years. You will also be charged 6% IHT if and when you decide to exit the trust at a later date.

Using a trust to avoid inheritance tax

There are some very tax efficient features that trusts have. However, it is not correct to assume that creating a trust helps you avoid inheritance tax.

You will still have to pay tax.

Trusts help reduce or stagger the costs of IHT depending on your circumstances. The best way to find out how to set up a trust in the most tax efficient way is to talk to an Adviser as they will need to find out all about your family finances before recommending a way forward.

How much does it cost to set up a trust?

The cost of a trust depends on the size of your estate and the complexity of what you want it to do.

It will also depend on whether you want the company to help you manage the trust along with your chosen trustees.

Fixed fees tend to be starting points as there is no one ‘off-the-shelf-solution’. This just reflects how many different families and family circumstances there are.  

To help you decide which trust might be of use to you, we’ve put together a list of the most commonly used trusts here in the UK.

Different types of trusts

DISCRETIONARY TRUST

This covers most of the scenarios described above and is one of the most common Trusts. We can create one as part of your Will to ensure that your money stays with your loved ones after you have passed away.

BARE TRUSTS

This is a trust that is created to hold assets on an individual’s behalf until they are ready to take ownership. They are most commonly used to look after a child's inheritance until they are old enough to receive it.

You will pay no IHT when you create a bare trust, but it will be taxed as part of your estate if you die within 7 years of creating it. Otherwise the assets placed in the trust are treated as exempt transfers.

LIFE INTEREST TRUST

This is also a common type of Trust. You might want to leave your house to your children but want your wife to be able to stay in the house for the remainder of her life without passing ownership to her. You could want your assets to pass to your children yet allow your husband to retain access to them until he remarries.

There are lots of reasons why these would be desirable to you. Talk to your Hillman Legal Advisor and tell them what’s worrying you.

FAMILY TRUST

A FT is a popular way of ringfencing particular assets such as property to protect them for the family down the generations. Placing a property in the trust for example would mean the family could enjoy it and it could be passed down but not exposed to dangers that exist when it passes into someone’s actual name – such as bankruptcy, divorce, or health care costs.

BUSINESS TRUST

A Business Trust is a good way of ensuring that in the event of your death your spouse continues to receive the financial benefits of the business. In this scenario it is common to make your business partners Trustees and your spouse the beneficiary.

DISABLED TRUST

Disabled Trusts are a great way of leaving money to a relative with disabilities without that money having a negative impact on their disability allowances.

LOAN TRUSTS

You can use a loan trust to limit any potential future increases in the value of your estate. They work by you lending your assets to the trust. This way they still form part of your overall estate but any investment returns fall outside the estate for tax purposes.

CASE STUDY 1

“Mrs Smith has an only child, Dave, and wants to leave her house and savings to him in her Will.

However, she is worried because Dave has married a woman, called Sue, who Mrs Smith doesn’t really trust. They argue a lot and last year Sue confessed to having had a brief affair.

What if Dave and Sue get divorced after her death?

In a normal scenario Sue could be entitled to half of everything Mrs Smith leaves Dave under a typical divorce settlement. But by placing her property and savings in a Trust, and making Dave the beneficiary, Dave will be able to enjoy the benefit of her entire Estate without actually owning it.

Therefore, in the case of a divorce, Sue may not be entitled to some of the Estate.”

CASE STUDY 2

“Bob and Jenny are a young married couple with two small children. Bob has a health condition and is worried that he might not live to see his children mature. He wants the best for his family and would expect his wife to remarry if he did die, as she is still young.

His concern is what could happen to his children in the event of this all taking place. Under normal ‘intestacy laws’ a proportion of his estate would pass to his wife when he dies.

However if she remarries and forgets to write a valid Will herself – and she then dies – the entire Estate could pass to her new husband. This effectively disinherits his children, with everything he owns passing to a man who may or may not have his children’s’ best interests at heart.

By creating a Discretionary Trust and making his children the beneficiaries he can rest assured that his children will always enjoy the benefit of his Estate regardless of what his wife does after his death. This takes a huge amount of worry off of Bob’s shoulders.”