Tax Insider Reports: Using Trusts - The types of Trusts
What is a trust? Many believe that trusts are complicated to understand and expensive to run but in reality, a trust is simply a private legal arrangement whereby assets are transferred to a group of people who are instructed to hold those assets for the benefit of others.
The following is an excerpt from our best-selling property report How to Use Trusts to Reduce Property Taxes, the special guide tells you everything you need to know about Trusts in relation to property with reference to the UK’s tax laws and includes strategies on how trusts can be used to secure the future of property assets and minimise taxes.
The Different Types Of Trust
The two main types of trust available for use in the UK are:
‘Qualifying Interest in Possession’ (‘QIIP’) Trusts and ‘Discretionary’ Trusts (also known as ‘Relevant Property Trusts’).
Detail of the two main types trusts:
- QIIP Trusts
Under a ‘QIIP’ trust, a beneficiary is entitled to the income received by the trust (which could include rental income) without any recourse to anyone else. HMRC’s view is that a QIIP exists if the beneficiary has:
i. a present right to present enjoyment; ii. of the net income of the settled property; and
iii. without any further decision of the trustees being required. (Pearson v CIS 1980 STC 318)
‘QIIP’ trusts are frequently created primarily to satisfy the settlor’s desire to protect capital rather than saving tax. This would be particularly in point with reference to property. Should this be the case then the trust can be written to enable a series of successive interests before the capital vests absolutely to the beneficiaries, if ever. QIIP trusts can be very flexible if drafted correctly.
- Discretionary trusts
In comparison, the beneficiary of a ‘Discretionary’ Trust is not entitled to either the income or the actual property, rather, it is at the absolute ‘discretion’ of the trustees as to how both are distributed dependent upon the terms of the Trust Deed. It is, therefore, usual for there to be at least two beneficiaries so that the trustees can exercise their ‘discretion’. However, it could be possible for there to be effectively one beneficiary so long as there is also a default beneficiary such as a charity – the trustees will then be able to exercise their ‘discretion’ between the two.
A variation on a theme - other types of trust
- Bare trust – this type of trust is the simplest type of trust arrangement whereby the trustee holds property on behalf of the beneficiary and acts in accordance with that beneficiary’s wishes. Although the trust is the legal owner of the property, the trustee has no discretion such that the beneficiary is absolutely entitled to all the trust assets and not just the right to receive income from any assets held within the trust. A typical example of such a trust arrangement is where a parent sets up a bank account for his child. The parent will be acting as ‘bare trustee’ holding the property on behalf of the child. Any interest earned on the account is the child’s income and the child has the right to both the income and capital held in the account at any time.
This an excerpt from our popular tax report How to Use Trusts to Reduce Property Taxes, to get the full report go here.