Trusts have become something of a political football in recent years and their use is often called into question with the implication that by putting a trust in place, the motives for doing so, are driven by tax avoidance and the wish to be not transparent about the ownership of the assets.
However, it’s important to note that trustees, or those benefiting from the trust will often have tax to pay, just like everyone else. If the assets produce an income, the trustees are responsible for ensuring that the income is reported, and the tax paid on the due dates in the usual way. Likewise, where assets are sold and the trustees make a gain, there will be Capital Gains Tax to pay.
Therefore, the use of a trust is more often about the protection and preservation of assets that have taken a lifetime of hard work to earn rather than an overreaching desire to mitigate tax bills. For this reason, trusts are a very useful tool for farming families seeking that protection.
What is a trust and when are they needed?
Put simply, a trust is the separation of legal and beneficial ownership. The trustees have legal ownership and are responsible for the assets placed under their stewardship. They have a duty to administer the trust and its assets responsibly, on behalf of the beneficiaries.
A trust could be appropriate for farming families when considering the future of their assets in the event of divorce or death. In the case of divorce, where there are minor children of the marriage, one way to ensure they are the sole beneficiaries of your assets would be to create a life interest trust. In the event of you remarrying and buying a new home, this would mean your new partner has the right to use and enjoy the property after your day for the remainder of their life, but when they die, the interest in the property passes to your children and not into their estate, where the property may be left to someone other than your children.
What is a discretionary trust?
The trustees of a discretionary trust have discretion and decide to whom and how much of the income, and capital, is distributed amongst the eligible beneficiaries and when they will receive it. As an example, if you have built up a successful business and have spare funds, you might like to help your grandchildren, for example, with their education. A gift into a discretionary trust could generate this income which could be distributed to perhaps pay school fees or fund university education
This ensures that there is flexibility to meet the needs of your grandchildren at different stages in their life. This can also be very tax efficient. The children will each have a personal allowance and therefore in many cases, the income will not be charged to income tax in their hands. The income is received in the first instance net of tax and therefore the children can reclaim any excess tax deducted
Setting up a trust is a complicated area and it is crucial to seek professional advice before undertaking any planning of this nature. Income Tax, Capital Gains Tax and Inheritance Tax are all issues that will feature in the use of trusts, and each requires careful consideration before implementation.
For more information and advice about trusts please get in touch.
