A trust is a legal arrangement where a person (“the Settlor”) transfers assets to another person (“the Trustee”) so that they can be used to benefit a third person or group of persons (“the Beneficiaries”). In doing this the Settlor lose ownership and control of the assets. Note that a Trustee need not be a natural person and can be a corporation.
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The key characteristic of a trust is that it allows legal ownership and beneficial interest to be separated: the trustees become the owners of the trust property as far as third parties are concerned, and the beneficiaries can expect the trustees to manage the trust property for their benefit, indeed that is their legal obligation.
The Settlor may give the Trustees specific instructions as to how to deal with and distribute the trust assets. Alternatively, the Settlor may give the Trustees discretion as to how to share the assets between the Beneficiaries and when to make any distributions. If the trust is discretionary, the Settlor cannot insist that the Trustees act in certain way. However, the Settlor may give the Trustees guidance as to how he would wish them to act in a "Letter of Wishes". The Trustees should always consider the terms of the Letter of Wishes in making any decision in relation to the trust or its assets.
Where trust assets require registration (e.g. land, company shares) the UK Trustee will normally be registered as the legal owner.
A UK trust offers confidentiality and anonymity as there are no requirements to disclose details of the settlor or beneficiaries where settled by a non-resident or non-domiciled settlor. The trust need not be administered in the UK but can be if required.
Trusts are often created in low tax jurisdictions but even in the UK it is also possible to establish a trust which will be free of taxation in the UK, provided certain conditions are met.
There are a number of different types of trusts and all have their own nuances; broadly though trusts are either constructive (meaning by operation of law) or express (giving expression to the Settlor’s intentions). Express trusts can be:
- Bare – the beneficiary is entitled to the benefit of the trust property and the trustee must act on the beneficiary’s instructions
- Interest in Possession – one or more beneficiaries have the right the benefit of the property
- Discretionary – the benefits to be bestowed on the beneficiaries are at the discretion of the trustees
- Contingent – usually where the benefit is contingent upon the beneficiary reaching a certain age
Trusts have a wide variety of applications, including:
- Enabling property to be held for persons who cannot, for reasons of capacity, hold it directly themselves;
- Allowing someone to make provision for others privately;
- Preserving property for future generations;
- Protecting property against claims brought against any of the beneficiaries;
In a commercial context the existence of a trust can add complications, both for the trust and third parties. This is because trustees must:
- Consider their fiduciary duties when deciding whether to act;
- Ensure that they are not exposed to personal liability, whether this is to the beneficiaries or to third parties.
To create a valid express trust there must exist the “three certainties”:
- Certainty of words;
- Certainty of subject matter – meaning the trust property must be defined or capable of being unambiguously identified;
- Certainty of objects. The beneficiaries must be certain, or capable of being becoming certain.
Taxation Matters and Trusts: Snapshot
When a settlor creates a trust the trust itself does not incur tax because it is not a legal entity (unlike, for example, a company). The taxable entities are:
- The trustees who are usually liable for tax during the lifetime of a trust, for example, when they receive income or sell trust assets – the burden of the taxation is normally born by the income or gain made by the trust; it should be noted that the trustees of a UK trust will be exempt from UK taxation on trust income and capital gains provided that the following conditions are met:
- The settlor and beneficiaries are not domiciled, resident or ordinarily resident in the UK.
- The trust assets are situated outside the UK.1
- No UK sourced income or gains arise in the trust.1
- There is at least one non-UK resident trustee who is properly consulted on all relevant matters.
- A settlor may be charged on making gifts to a trust, or where the settlor benefits from the income of the trust, but can usually claim reimbursement of income tax from the trustees;
- The beneficiaries may be charged if they receive income or capital from the trust (or they may receive distributions, particularly of capital, net of tax).
The taxes that apply to trusts are:
- Inheritance tax (IHT), applies differently to different types of trust;
- Capital gains tax (CGT), interacts with the IHT;
- Income tax and again the application differs by type of trust.
- Other taxes such as Stamp duty, SDLT, SDRT, VAT
Contact our Trusts and Trust Formation Solicitors in London Today
A UK trust can provide the ideal solution where a person has a reason to separate the ownership of the assets from the beneficial aspects of owning those assets. This can be done for many reasons, amongst them tax planning. Even “onshore” trusts can provide tax benefits normally only associated with tax haven locations.
The legal and taxation position of the settlor and beneficiaries of a UK trust will depend on the laws of their residence and/or domicile. Specific legal and taxation advice should be obtained by the settlor and/or beneficiaries in their country of residence before entering into any trust arrangements. We are often able to organise such advice or will work with the client’s existing advisors if required.
If you wish to discuss the formation of your trust or receive advice on an ongoing trust, please get in touch by calling us on 02077902000 or by completing our online enquiry form to speak with one of our experienced solicitors.