Trusts and Family Wealth: How Do Trusts Work and How Are They Taxed?
By Georgia Holmes
Discover how trusts can help you manage family wealth, protect assets and plan your inheritance. Explore the main types of UK trusts, how they work and the potential tax implications.
If you're looking to protect your family's wealth, pass money on to your children or grandchildren, or plan for Inheritance Tax (IHT), you may have considered setting up a trust. Trusts can help families manage and pass on assets, but they come with important legal, tax and administrative responsibilities.
Understanding how trusts work is particularly important if you have property, investments or a sizeable estate that you want to pass on in a controlled way. The right arrangement may give you greater control over who benefits from your wealth and when, but a trust is not automatically the most tax-efficient option.
Read on to learn what a trust is, the main types of trusts in the UK, how trusts are taxed and what to consider before using one as part of your family wealth and inheritance planning.
What Is a Trust and How Does It Work?
A trust is a legal arrangement in which assets are held and managed by trustees for the benefit of other people, known as beneficiaries.
There are three main parties involved:
The settlor: The person who creates the trust and transfers assets into it.
The trustees: The people responsible for managing the trust assets in accordance with the trust deed and relevant law.
The beneficiaries: The people who may receive income, capital or other benefits from the trust.
The trust deed sets out how the arrangement works, including who can benefit and what powers the trustees have.
Trusts can hold a range of assets, including cash, investments and property. Depending on the type of trust, they can help parents provide for children, allow a surviving spouse to benefit from assets while preserving capital for other family members, or provide financial support for someone who may not be able to manage money independently.
However, transferring assets into a trust can have tax consequences, and the settlor may give up some control or access to the assets. It is important to understand these implications before proceeding.
What Are the Main Types of Trusts in the UK?
Different trusts serve different purposes. The three types most commonly encountered in family wealth planning are bare trusts, interest in possession trusts and discretionary trusts.
Bare Trusts
A bare trust is generally the simplest type of trust. The trustee holds assets on behalf of a named beneficiary, who is entitled to the trust's capital and income.
Bare trusts are sometimes used by parents or grandparents to hold investments for children. The trustee manages the assets, but the beneficiary has an absolute right to them and can generally take control at age 18 in England and Wales, or 16 in Scotland.
Potential benefit: A bare trust can provide a straightforward way to hold assets for a child while they are young.
What to consider: Once the beneficiary reaches the relevant age, they can generally demand the assets. This means the person who created the trust cannot necessarily control how or when the beneficiary spends the money.
Tax treatment can also be affected…