Trusts - Alive and kicking or dead and buried?

Is the Trust still alive and kicking and hence a valuable planning tool or has it had its day and a thing of the past?

From a tax perspective the landscape of Trusts has changed significantly since the new rules were introduced in 2006.  These have effectively made the treatment of all new Trusts (with a minority of exceptions) the same for tax purposes.

The most common types of Trust are Interest in Possession (IIP) and Discretionary Trusts (DT).  IIP gives the beneficiary the right to income over the trust assets whereas with a DT the distributions to the beneficiaries are at the absolute discretion of the trustees.  

Before 2006 IIP Trusts were not subject to entry, exit and 10 years charges but were included in the individual’s estate at death. Broadly, for new Trust and settlements into existing trusts (from 2006) IIP and DT’s are treated the same for tax purposes.  

Under the new regime new Trusts are not included in an individual’s estate at death but are subject to the entry, exit and the 10 year charges regime unless an exemption applies.

Historically trusts have been used for tax planning, passing on assets, protecting assets and preserving the family wealth.  

So given the changes, do they still have a place in today’s planning environment?

The answer is yes, although more thought needs to be put in to the use of Trusts and in particular the settlement of assets into Trusts.

Trusts can be an effective planning tool for inheritance tax, planning for non UK domiciled individuals, together with an effective way of preserving the family wealth and protecting assets in the future. However, more care is required to ensure any tax exposures are managed effectively when Trusts are used.

Accordingly, trusts are not dead but need to be considered with the overall personal strategy of the individual and the family for both tax planning and maintenance of the family wealth. As such, you should be speaking to your advisors about these when considering your overall strategy for preserving wealth and minimising taxes.

To discuss this article in more detail or for advice on trusts, call Rob Wardle on 0161 245 1000 or email rwardle@clbcoopers.co.uk