Types of trust
Trusts are sometimes referred to as family trusts because they are often used to protect family wealth and assets. However, trusts don't have to be for the benefit of family members. 'Trust' is an umbrella term and each different type of trust listed below comes with its own specific procedures and regulations.
Bare trusts or simple trusts
Assets in a bare trust (or 'simple trust' as they are sometimes known) are held in the name of a trustee until the beneficiary turns 18 or over (in England and Wales), or 16 or over (in Scotland). At that point, the beneficiary has the right to all of the capital and income. Bare trusts are often used to pass assets to young people – the trustees look after them until the beneficiary is old enough.
Interest in possession trusts
Also known as a life interest trust, an interest in possession trust is established either in your lifetime or by your will. It provides the beneficiary (who is known as the 'life tenant') with the right to receive the income (after expenses) from the trust. This right is usually given for their lifetime. On their death, the trust fund passes to the other named beneficiary or beneficiaries, known as the 'residuary beneficiary/beneficiaries'. The life tenant never gets any right to the capital unless this is expressly stated in the trust deed. If there is a property held in the trust, the life tenant is entitled to either receive the rental income from it or to live in the property, if they wish.
A discretionary trust is a legal arrangement which allows the person putting the assets or money into trust (the settlor) to give their assets to a trusted group of people (the trustees), who look after it. At a future point, they pass on the assets to another group that the settlor has decided on (the beneficiaries). The trustees have discretion about which of the beneficiaries to pass it on to, how much each will get, and when. The assets are said to be 'held in trust' for the beneficiaries to one day decide what to do with. The assets in trust, and any payment received from them, are called the trust fund. Discretionary trusts are commonly used to keep wealth within families while allowing them some flexibility to make decisions about where the assets go.
Accumulation and maintenance trusts
An accumulation and maintenance trust is one in which the beneficiaries will become entitled to the property, or at least the income, when they reach a certain age (no older than 25). The trustees can use the income for the maintenance of the beneficiary before the date on which that beneficiary becomes entitled to the property or to an interest in possession in that property.
Trustees of an accumulation and maintenance trust are given power to 'accumulate' the income of the trust until a certain date, at which time the beneficiary, or beneficiaries, are entitled to the property of the trust or to the income arising from that property.
A mixed trust is a mixture of more than one type of trust, for example:
- an interest in possession trust and a discretionary trust, or
- an interest in possession trust and an accumulation and maintenance trust.
As a settlor involved in a settlor-interested trust, you keep an interest in the trust or settlement if in any way the property can be paid to or applied for the benefit of you, or your spouse or civil partner.
If you are a settlor who has kept an interest, you are taxable on the income arising to the trust or settlement, even if you do not actually receive it. In the case of a trust, where the trustees have incurred expenses in managing that trust, you cannot deduct those expenses to reduce the amount taxable on you.
This is a trust where the trustees are not resident in the UK for tax purposes. The tax rules for non-resident trusts are complicated.
Advice on setting up a trust
If you are not sure which type of trust is right for you, we can put you in touch with financial adviser who will be able to tailor advice for the specific objectives you have and the assets you own.
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Last updated: 26 May 2015