A trust is a way of managing assets such as money, investments, land or buildings. There are different types of trusts and they are taxed differently. Here you can see trusts simplified through a taxation process.
The trustees are the legal owners of the assets held in a trust. Their role is to:
- Deal with the assets according to the settlor’s wishes, as set out in the trust deed or their will
- Manage the trust on a day-to-day basis and pay any tax due
- Decide how to invest or use the trust’s assets.
Trusts are set up for a number of reasons, including:
- To control and protect family assets
- When someone’s too young to handle their affairs
- When someone can’t handle their affairs because they’re incapacitated
- To pass on assets while you’re still alive
- To pass on assets when you die (a ‘will trust’)
- Under the rules of inheritance if someone dies without a will (in England and Wales)
The perception of Trusts being complex to administer, particularly when income is being received are common. In addition clients are often aware of the high rates on income tax that a Trust can suffer.
In most cases nothing more than a mandate of income to a chosen recipient beneficiary or beneficiaries will result in zero ongoing administration and the income tax rate of the recipient beneficiary or beneficiaries apply.
Unlike other investment solutions, investment bonds are non-income producing. Income and gains are dealt within the plan. This means there are no income or capital gains which the Trustees have to report and pay tax on each year. Income tax may only be due when the policy comes to an end or withdrawals of more than the 5% cumulative allowance are taken.
Unlike other similar investments, chargeable gains remain assessable upon the settler during their lifetime. So the trustee rate of tax is only payable if the settler is deceased.
When trustees are ready to make an appointment to the beneficiary one of the options is they can assign the bond (or segments) to them without creating a chargeable event. The beneficiary then takes ownership of the bond and can surrender at an appropriate time, with any gains assessed upon them benefiting from their own allowances and tax rates.