Trusts and Inheritance Tax

Why do people use trusts?

Produced by Tolley
  • 19 Oct 2021 23:07

The following Trusts and Inheritance Tax guidance note Produced by Tolley provides comprehensive and up to date tax information covering:

  • Why do people use trusts?
  • Control
  • Sham trusts
  • Protection
  • Flexibility
  • Tax considerations
  • Tax factors to consider in creating a lifetime trust
  • Tax factors to consider in creating a Will trust

Why do people use trusts?

Trusts have a long history of use as a means for people to protect their assets and to control their management as well as how those assets are transferred to others. The elements of protection and control are key to understanding the reasons why people use trusts. Flexibility is also an important factor. Finally, tax issues may influence the use of a trust. A trust is a more costly and complex way of passing on property than an outright gift and so will only be used where there are benefits over and above an outright gift.

This note explains some of the general reasons for using trusts both during lifetime and on death.


A trust exists where someone (a trustee) holds assets for the benefit of others (the beneficiaries). The person who transfers assets to the trustees (the settlor) sets the agenda at the outset and decides the extent of the beneficiaries’ interests and the powers available to the trustees (so can choose a fixed or flexible trust). This is the control element, which starts off with the settlor and moves across to the trustees.

Retaining control over the ultimate destination of assets is an important reason for using trusts. The settlor can immediately divest himself of ownership and yet the existence of a trust prevents ownership passing straight onto the beneficiaries. The settlor / trustees decide the timing and extent of the beneficiaries’ interests. This way, ownership can be transferred over gradually to the next generation.

Retaining control over the management of assets without beneficial ownership is another important reason for using trusts. This can be particularly useful for dealing with succession to family business assets. Business owners may wish to pass on their shareholdings to the next generation without giving up voting control. If company shares are transferred into trust, the trustees acquire the voting rights and these can remain with the settlor if he is himself a trustee.

Sham trusts

The extent

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