There are several types of trust.
Setting up a basic trust might have minimal cost. While others are more complex to set up and would need more specialist advice, which are more expensive.
Some trusts are subject to their own Inheritance Tax regime. So when the assets have successfully been transferred into trust, they’re no longer subject to Inheritance Tax on your death.
Others pay income and capital gains tax at higher rates. So it’s important to know what type of trust you have.
The kind of trust you choose depends on what you want it to do. Here are some of the most common options:
- Bare trust – this is the simplest kind of trust. The beneficiary(ies) become entitled to all the assets in the trust once they reach the age of 18.
- Interest in possession trust – the beneficiary can get income from the trust straight away, but doesn’t have a right to the cash, property or investments that generate that income. The beneficiary will need to pay Income Tax on the income received. You could set up this kind of trust for your partner, with the understanding that when they die the investments in the trust will pass to your children. This is a popular trust structure used in the will of a person who remarries after divorce, but has children from the first marriage.
- Discretionary trust – the trustees have absolute power to decide how the assets in the trust are distributed. You could set up this kind of trust for your grandchildren and leave it to the trustees – who could be the grandchildren’s parents – to decide how to divide the income and capital between the grandchildren. The trustees will have the power to make investment decisions on behalf of the trust.
- Mixed trust – combines elements from different kinds of trusts. For example, a beneficiary might have an interest in possession, such as a right to the income, of half of the trust fund. The remaining half of the trust fund could be held on discretionary trust.
- Trust for a vulnerable person – if the only person who benefits from the trust is a vulnerable person – for example, someone with a disability or an orphaned child – there’s usually less tax to pay on income and profits from the trust.
- Non-resident trust – a trust where all the trustees are resident outside the UK. This can sometimes mean the trustees pay no tax or a reduced amount of tax on income from the trust.