What is a Trust Fund?
A trust comes into effect when a ‘settlor’ places money, land or other assets in the hands of trustees. The trustees are the legal owners of the property but are obliged to hold and manage the property for the benefit of a person or a group of people, who are called beneficiaries.
Types of Trust
In this type of trust, the beneficiary has an immediate and absolute right to the property in the trust. The trustees have no discretion as to how the fund is managed. The income of these funds is taxed as if it is the income of the beneficiary.
Here the trustees have discretion over to whom and when payments should be made and also whether conditions should be attached. They are usually given discretion as to the investment of the fund. This type of fund may or may not be allowed to accumulate income. Discretionary trusts are taxed as ‘relevant property’ trusts in accordance with the Inheritance Tax Act 1984 and attract the following taxes:
- an ‘entry’ tax on lifetime transfers to the fund where the money transferred exceeds the Inheritance Tax (IHT) threshold;
- a ‘periodic’ tax, levied every ten years, on the value of trust assets which exceed the IHT threshold; and
- an exit charge if funds are withdrawn between ten year anniversaries.
In addition the trust must pay income tax on its income.
Accumulation and Maintenance Trust (A&M)
In an A&M trust, the settlor places money in trust for children/grandchildren until they reach a specified age (maximum age 25), when they become entitled to the trust fund.
Interest in Possession Trust (IIP)
Here, the beneficiary has a right to the income but not the capital of the trust fund. For example, a beneficiary may be allowed to receive the income arising from shares during their lifetime with the shares to go to their children on their death.
Prior to the 2006 Budget, IIP trusts and A&M trusts enjoyed special tax treatment. Lifetime transfers did not attract IHT if the settlor survived seven years and the funds did not attract periodic or exit charges. The funds will now be taxed in much the same way as discretionary trusts with certain exemptions, which (fortunately) mean that they will continue to be beneficial to use in many cases for IHT planning in wills.