Ensure you don’t pay more tax than is necessary

There are now three main types of trusts.

Bare (Absolute) trusts
With a bare trust you name the beneficiaries at outset and these can’t be changed. The assets, both income and capital, are immediately owned and can be taken by the beneficiary at age 18 (16 in Scotland).

Interest in possession trusts
With this type of trust, the beneficiaries have a right to all the income from the trust, but not necessarily the capital. Sometimes, a different beneficiary will get the capital – say on the death of the income beneficiary. They’re often set up under the terms of a will to allow a spouse to benefit from the income during their lifetime but with the capital being owned by their children. The capital is distributed on the remaining parent’s death.

Discretionary trusts
Here the trustees decide what happens to the income and capital throughout the lifetime of the trust and how it is paid out. There is usually a wide range of beneficiaries, but no specific beneficiary has the right to income from the trust.

Some trusts will now have to pay an Inheritance Tax charge when they are set up, at 10 yearly intervals and even when assets are distributed. The right type of trust in conjunction with your overall financial planning could help minimise the amount of Inheritance Tax payable. This is a highly complex area and you should obtain professional advice to ensure the right type of trust is set up for your particular circumstances.