UK Trusts

The main distinctions are bare trusts, interest in possession trusts and discretionary trusts.

Bare trusts – a bare trust is a simple agreement whereby one individual holds an asset as nominee for the other. In these cases, the income and capital belong to the beneficiary absolutely.

Interest in possession (IIP) trust – an IIP trust is one where the beneficiaries have an entitlement to the income of the assets held, or an entitlement to make use of them (e.g. to occupy a trust property rent free), but they are not entitled to the trust capital absolutely.

Discretionary trust – In a discretionary trust, beneficiaries have no fixed right to income or capital from the trust. Rather, the trustees have discretion over who benefits, when, how and to what extent.

Careful consideration is required for inheritance tax and capital gains tax when establishing a trust. It’s a common misconception that assets in trust are exempt from inheritance tax. You’ll normally pay trust tax rates at 20% when setting up a trust if it’s in excess of the inheritance tax nil-rate band. There will also be reporting required on each 10 year anniversary and also if the trusts are wound up or assets are distributed to the beneficiaries.

The distinction between IIPs and discretionary trusts is important for income tax purposes and professional advice should be sought.