Common Kinds of Trusts in United Kingdom
- Accumulation and maintenance trust
- Bare trusts (the simplest type)
- Discretionary trusts
- Interest in possession trusts
- Mixed trusts
- Non-resident trusts
- Settlor-interested trusts
- Will trusts
Important: The responsibilities of the ‘settlor, ‘trustee’, and ‘beneficiary’ determine how it will be managed. But, the way trusts are taxed by HM Revenue and Customs (HMRC) will be based on the way that legal arrangements differ.
Accumulation and Maintenance (A&M) Trust
The primary function of accumulation trusts is making provisions for children and young adults (up to the age of twenty five).
One of the key features in these types of trust is the authorisation for the trustee(s) to accumulate income within it – and augment it (add) to any existing capital entitlements.
Also, similar to discretionary trusts, this kind of legal agreement can be used to provide a source of maintenance for the child by paying out a regular income.
Bare Trusts for Minors
Because the assets held in a bare trust would usually be issued in the trustee’s name, they are generally used to control and protect the family assets of young people – then pass them on as the child gets older (18 in England and Wales and 16 in Scotland).
As a result, from the age of eighteen (18) in England and Wales, the beneficiary would have the immediate right to access the total capital and income held in a bare trust.
So, because the ‘settlor’ will be setting aside the assets on behalf of the intended ‘beneficiary’, the capital would always go ‘directly’ to the child once they get old enough.
Example of how a bare trust works:
After making a will, you have decided to leave some money in a trust fund for your younger brother to access when he gets older.
The total entitlement of the money, along with any income that it generates (e.g. interest payments), would go to your brother ‘only’. Furthermore, he would be able to take full possession of any money held inside the trust at any time (having met the minimum age restrictions).
Note: Another section has more information on how Inheritance Tax is paid when a person dies and their estate has gone above the threshold.
Benefit of a Discretionary Trust
Discretionary trusts empower the trustees with complete authority for making certain decisions about using the assets (income, and in some cases the capital as well).
As a result, and it will depend on the terms stated in the trust deed, the trustees of a discretionary trust will be able to make decisions about:
- How often any relevant payments are made and what is paid out (e.g. capital or income).
- Which beneficiary will receive the payments.
- Whether there will be any conditions imposed on any of the beneficiaries.
Thus, some of the common reasons for setting up discretionary trusts is to have valuable assets put aside for (either):
- Beneficiaries who may lack mental capacity (e.g. not responsible enough or incapable of dealing with their own financial affairs).
- Future needs (e.g. for grandchildren who are likely to need specific financial help – more than any of the other beneficiaries).
Interest in Possession Trust
Having trustees pass on all the income to beneficiaries as it earned (minus expenses) is one of the key features of this type of trust.
But, even though the beneficiary would be able to get an income straight away, they would not be able to control the assets that generate it. They would also have Income Tax liabilities on the money they receive.
In the UK, it is a common way for a settlor to grant their partner access to this kind of trust. As a rule, the assets would pass over to the settlor’s offspring after their partner’s death.
Interest in possession trust example:
Let’s suppose you have become a professional stock trader and you want to create this type of trust to hold the shares that you own.
After your death, the terms stated in the trust direct the income realised from the shares to your wife (while she is alive). But, when your wife dies, you have the shares pass down to your children.
Hence, the wife is the named beneficiary of the income generated by the shares. But, even though she has an ‘interest in possession’ in the trust, the wife does not have a right to the actual shares.
It is possible to combine more than one type of trusts. But, HMRC tax rules for mixed trusts means they will be treating each element differently.
So, a typical example of a mixed trust would give the beneficiary access to half of the fund (e.g. the income part from the interest in possession).
The main benefit of setting up a trust for the settlor is they, their spouse, or their civil partner can get access to the assets held inside. Thus, these kinds of trusts can be set up as either an accumulation, a discretionary, or an interest in possession type.
Example of a settlor-interested trust:
Supposing you are unable to continue working (e.g. because of a serious illness). The purpose of setting up your discretionary trust is to ensure money will be available in the future.
As the ‘settlor’, you have an additional opportunity of benefiting from the trustees being able to make extra payments to you as well.
UK Rules for Non Resident Trust
Non-resident trusts are for trustees that are not living in the United Kingdom for tax purposes. Thus, because all the trustees will not be resident in the UK, the beneficiaries may end up paying less income tax.
Note: HM Revenue and Customs (HMRC) publishes further guidance about the basic rules for trustees, settlors, and beneficiaries of non-resident trusts.
Will Trusts (property trust)
Generally, married people (or those living in a civil partnership) will benefit most from setting up a Will Trust. The main advantages include:
- Ensuring your spouse (husband, wife) or partner can stay in the property after you die.
- Being able to protect your share of the property (as Tenants in Common) against care home fees.
- Making sure your children receive a minimum of 50% of the property in their inheritance.
Example of how a Will Trust works:
You and your wife own your own home ‘jointly’ and you would like to leave a share of the property to your children when one of you dies. It is also important to ensure at least half of the property is protected if a surviving spouse needs care (e.g. goes into a care home).
Let’s say one of you dies… that particular share of the property would be placed into a Will Trust. Whereas, the surviving partner can continue living in the property.
So, what if the survivor needs to pay for care in the future? If so, only that half of the property qualifies when the Local Authority assesses the care fees. Furthermore, they would not be able to force you to sell the home to cover the care fees. The other half (protected in the trust) would pass to the children after death.
What would happen if the survivor did not need care (e.g. stays in the property)? In this case, that half of the property would go to the children along with the other half (already held in trust).
Related Help Guides about Trusts
- Parental trusts for children under the age of 18.
- Trusts for vulnerable people (e.g. disabled).
- Trusts and Inheritance Tax on a person’s estate.
Note: The index section has extra information about trusts and taxes in Great Britain (England, Scotland, Wales) and Northern Ireland.