Use of family trusts

By Tolley
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The following Owner-Managed Businesses guidance note by Tolley provides comprehensive and up to date tax information covering:

  • Use of family trusts
  • Main types of trust
  • Summary of the taxation of trusts
  • Immediate post-death interest trusts
  • Other popular or tax advantaged trust arrangements

This guidance considers the rules relating to trusts after 26 January 2006. It does not consider the rules applicable before that date. This guidance covers UK resident trusts only. For information on non-resident trusts, see the UK tax position of non-resident trusts guidance note in the IHT Trusts and Estates module (subscription sensitive).

Although many of the tax advantages of using trusts were removed in recent years, they continue to be popular in succession planning. The potential benefits of using trusts include:

  • to give flexibility over future destination of property and to take account of future changes in the tax regime
  • protection of property from unsuitable / undesired parties obtaining control (for example irresponsible children)
  • protection of property for the benefit of certain specified beneficiaries (for example for the benefit of the deceased’s own children as opposed to step children)
  • ensure suitable destination of life policies / lump sum payments under pension schemes etc
  • certain trusts are advantageous for tax purposes (see below)
  • lifetime transfers into trusts are generally subject to IHT at the lifetime rate of 20% (after the nil rate band) which is an improvement on the death rate of 40% applicable for transfers on death (provided the settlor survives for seven years after the transfer)
  • concealment of legal ownership by using a bare trust (ie for limited company shares)
  • to take value out of an individual’s estate
Main types of trust

In very broad terms, a private trust will either be 'discretionary' or 'non discretionary'. You will often see a non discretionary trust referred to as a 'life interest' trust or 'interest in possession' trust.

Discretionary trusts

A discretionary trust has the following features:

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