When we talk about trusts, we’re referring to a legal arrangement where ownership of assets is split between two parties: one who holds the asset (the trustee) and another who benefits from it (the beneficiary). This separation of legal and beneficial ownership opens the door to a range of financial and personal planning opportunities.
What Is a Bare Trust?
A bare trust is the simplest type. Imagine you’re holding shares or a property for someone else—perhaps a minor, someone who lacks mental capacity, or someone living abroad. In this case, you’re a trustee, and you must act entirely according to the beneficiary’s wishes. Any income or gains go straight to them, and they’re the ones who are taxed on it.
More Complex Trusts
Other types of trusts limit how and when the beneficiary can receive money or assets:
- Interest in Possession Trusts give beneficiaries the right to income from the trust, but not the capital.
These trusts are taxed in their own right at basic rate. Beneficiaries will receive a form R185 showing income and any tax already paid by the trustees. If the beneficiary is a non-taxpayer, they may be able to claim the tax back by submitting a form R40, if they are a higher rate taxpayer they may need to pay additional tax on this income through their tax return.
In some situations, beneficiaries receiving income directly may be taxed on it instead of the trust reducing the administration burden on the trustees.
- Discretionary Trusts give trustees full control over if and when a beneficiary receives anything at all.
These trusts are also taxed in their own right at additional rates of tax. Beneficiaries will receive a form R185 showing income and any tax already paid by the trustees. Since the trustees pay tax at higher rates than most individuals, beneficiaries can usually claim some or all of that tax back through their tax return or by submitting a form R40.
Setting Up a Trust
Trusts can be created while you’re alive or set up in your Will to take effect after your death. Either way, they offer powerful tools for managing your estate.
Why Use a Trust?
Trusts aren’t just about tax. They can:
- Protect assets from risks like divorce or bankruptcy
- Span multiple generations, helping with long-term planning
- Allow you to maintain control over how and when assets are distributed
- Adapt to changing circumstances
One especially flexible option is a Will trust. You don’t need to decide immediately who inherits what. Your executors and trustees can make those choices later, based on a “letter of wishes” you leave behind. This letter isn’t legally binding, but it guides decisions and can be updated at any time—no need to rewrite your entire Will.
Even better, decisions made within two years after death can be “written back” into the Will for tax purposes, allowing your estate to benefit from post-death planning opportunities.
Interested in Trusts?
Trusts can be a valuable part of your financial and estate planning. If you’re considering one—or simply want to explore your options—get in touch with us. We’re here to help.