A trust is a legal plan that keeps money or other assets safe for the benefit of more than one person. The two main types of trusts that can be set up for kids, grandchildren, or other people you choose are discretionary trusts and accumulation trusts. The directors of a discretionary trust can decide what to do with the trust's income, as the name suggests. They will probably give all or some of it to the beneficiaries. You might get this money from interest or dividends from stocks you own. On the other hand, an accumulation trust generally builds up income by adding it to the capital sum.
There are some trusts that have both authority and accumulation parts.
A trust can hold more than just money. It can also hold property and land. The beneficiaries will choose one or more managers to manage the trust on their behalf. In law, the trustees own the things that are held in trust.
Trusts with Freedom
The managers of a discretionary trust can choose what to do with the trust's income. They can decide whether to give it to the beneficiaries and, if so, how much to give them, or they can add it to the trust's capital. Along with that, they sometimes get to choose how the trust's money is spent.
They also decide how often payments are made and can give money to some people but not others. It will be clear from the trust deed exactly what powers the trustees have.
Trusts are usually set up to protect a family member who depends on you financially. This is especially important if the family member is a child and isn't expected to know how to handle big amounts of money.
Building up trusts
Any money made from interest, dividends, rent from property or land, or anything else will be kept in an accumulation trust and used to grow the capital. The trust deed may have rules about how long income must be saved (sometimes based on the age of the child) and when it can be given out.
Tax on Income
Any money that a trust makes is taxed as income, and it is the job of the managers to make sure that the right amount of tax is paid. Income is taxed at trust rates that are different for discretionary trusts and accumulation trusts. The first £1,000 of income is taxed at a cheaper rate. The rates that are used depend on where the money coming from is.
Since it is the trustees' job to pay income tax, when a recipient gets money from a trust, it is as if tax had already been paid at the trust rate that is in effect at the time. This can make things more difficult if the recipient is someone who doesn't pay taxes, like a child, because that person could then ask for the tax back at the current trust tax rate. There is a duty on the trustees to make sure that tax is made on all distributions and at the right rate.
Tax on Capital Gains
Trusts can hold assets like stocks, real estate, or land. If an item in a trust is sold, capital gains tax must be paid on the increase in value since it was bought, with an annual exemption amount taken into account. As with income tax, it is the trustees' job to pay any CGT that is due. It is important to know what these duties are, and a London accountant or tax expert can be very helpful in this area. It's up to the trustee to make sure that the trustee doesn't pay too much tax or too little tax.
Death Tax on Wills
An Inheritance Tax bill may be due by a trust in some situations, especially when assets are added to or taken away from the trust.
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