Investing for trusts, whilst having some areas in common with investing on a personal
basis, has to be dealt with differently to the extent that how trustees manage a trust is usually governed by the Trustee Act 2000.
What is a Trust ?
A trust is an obligation binding a person (a ‘trustee’) to deal with
property in a particular way for the benefit of another person or class of persons (of which he himself may be a member) whose
interests (except in Scotland) are protected by the equitable jurisdiction of the courts. (source: HMRC)
What Types of Trust are there ?
The following are the main types of trust, but there are others.
Bare or simple trust
This is one in which each beneficiary has an immediate and absolute
title to both capital and income. The beneficiaries of a bare trust have the right to take actual possession of trust property.
A bare trustee has no active duties to perform, and is essentially a nominee.
The beneficiaries of a bare trust should
normally return the income and gains on their own personal tax returns and the trustees are not required to make a tax return.
The trustees may pay the tax due to the Inland Revenue on behalf of a beneficiary, but it is the beneficiary who is strictly
chargeable to tax.
Interest in Possession Trust
This type of trust exists when a beneficiary, known in this case as an 'income
beneficiary', has a current legal right to the income from the trust as it arises. The trustees must pass all of the income
received, less any trustees' expenses and tax, to the beneficiary.
A beneficiary who is entitled to the income of the trust for life is known as a 'life
tenant' (a 'liferenter' in Scotland) or as having a 'life interest' (a 'liferent interest' in Scotland).
The income beneficiary need not, and often does not, have any rights over the capital
of such a trust. Normally, the capital will pass to a different beneficiary, or beneficiaries, at a specific time in the future
or after a specific future event. Depending on the terms of the trust, the trustees might have the power to pay capital to
a beneficiary even though that beneficiary only has a right to receive income.
A beneficiary who is entitled to the trust capital is known as the 'remainderman'
('fiar' in Scotland) or the 'capital beneficiary'.
Discretionary Trust
Trustees of a discretionary trust generally have 'discretion' about how to use the
income of the trust. They may be required to use any income for the benefit of particular beneficiaries, but the trustees
can decide
- how much is paid
- to which beneficiary or class of beneficiaries payments are made
- how often the payments are made
- what, if any, conditions to impose on the recipients.
The trustees may, or may not, be allowed to 'accumulate' income within the trust
for as long as the law allows rather than pass it to the beneficiaries. Income that has been accumulated becomes part of the
capital of the trust.
Accumulation & Maintenance Trust
An accumulation and maintenance trust is one in which the beneficiaries will become
entitled to the property or at least the income when they reach a certain age (no more than 25). The trustees can use the
income for the maintenance of the beneficiary before the date on which that beneficiary becomes entitled to the property or
to an interest in possession in that property.
Trustees of an accumulation and maintenance trust are given power to 'accumulate'
the income of the trust until a certain date, at which time the beneficiary, or beneficiaries, are entitled to the property
of the trust or to the income arising from that property.
In England and Wales, the beneficiary (unless the terms of the trust say otherwise)
becomes entitled to the income from the property held in the trust when he or she reaches age 18 and an interest in possession
trust is created at that point.
The position in Scotland is different, as there is no equivalent entitlement to the
income of the trust at age 18. However, Scots law limits accumulation periods so accumulation and maintenance trusts will
often end when the beneficiaries reach the age of majority.
The Finance Act 2006, which received Royal Assene ton the 19th July introduced major changes to the IHT
treatment of Trusts which affects both new and existing Trusts. Any trusts already in effect should therefore be reviewed
as a matter of urgency.
Why is investing for trusts different ?
There are a number of reasons by amongst these are -
- Tax - trusts follow a different tax regime with rates from Nil to 40%
- Trustee Act 2000 - places a legal duty on trustees and compliance with the requirements of the act are
imperative for any trustee
- Investing - the Trustee Act 2000 requires, in almost all cases, that trustees obtain properly qualified
advice and trustees have a duty to ensure that their chosen adviser is suitable
- Trust terms - the terms of the Trust might restrict or prohibit certain types of investment and any investments
must comply with such terms
- Beneficiaries - a trust will often have several beneficiaries, each with potentially conflicting requirements,
and investing for a trust must take these into account
We are extremely experienced in providing investment advice to trustees and assisting them through the
whole process, indeed we exclusively handle all such matters for one firm of solicitors.
HMRC provide a useful guide to Trusts here
