Trusts – are they still useful?
Recent years have not been kind to trusts because government has come to the conclusion that they are a bad thing used by tax avoiders and as receptacles for ill-gotten gains. That of course is true in some cases but there are many situations where a trust could be useful. They are still an effective way to protect assets for future generations. There are different types of trust. Perhaps the most common are discretionary trusts and bare trusts.
A bare trust is very like a nominee relationship. Let us say you wanted to provide assets or investments to your infant children. In a bare trust they would belong to your children for all tax purposes and at 18 they would have the right to demand the assets from you. Up to that point you would hold the assets on their behalf and you could only apply them for their benefit, for example to pay school fees. Bare trusts provide limited asset protection – just slightly more than simply giving the cash outright. Discretionary trusts give a greater degree of protection but it comes with a more onerous tax treatment. Cumulative transfers into trusts over £325,000 will incur inheritance tax at 20%; and death within 7 years of the transfer would result in a further charge of up to 20%. Inheritance tax is also charged every 10 years at approximately 6% on the value over £325,000 and on capital distributions from the trust.
The tax treatment of a bare trust is more simple. If you survive the creation of the trust by 7 years there is no inheritance tax to pay irrespective of the amount gifted. There are also no ongoing inheritance tax charges because the tax is deferred until the death of your children. You should remember, however, that you will be taxed on income on the assets held on trust while your children are under 18.