Trusts

There are two basic types of Trust, income in possession ( IIP ) and discretionary trusts. There are also charitable trusts but they are a very specialised area. All these types of trusts can be created as a Will Trust or as inter-vivo's ( lifetime ) trusts ( usually called a settlement).

The trustees are assessable for Capital Gains Tax when they sell the assets.

The interest in possession is the traditional Trust giving income to a life tenant on whose death the capital passes to individuals called remaindermen. They can include a power of appointment exercisable by the life tenant. The fund can also be sheltered by the use of a ‘protective life interest’. This is a statutory provision which prevents the life tenant from disposing of their right to income. It is also quite common to have flexible life interest trusts which are both flexible both as to a power to advance capital and to cancel the life interest. If set up during the lifetime of the donor the gift is treated as a Potentially Exempt Transfer (PET) for Inheritance Tax purposes.

In the discretionary Trust the distribution of income and capital is at the discretion of the Trustees who are often guided by a letter of wishes from the settler or testator. The administration of these Trusts is often complex and as a result expensive.

Inter-vivo's (lifetime) an election may be made an immediate liability at the lifetime rate of 20% on the excess over the nil rate band. There are also regular 10 year charges to IHT and exit charges on distribution and termination of the Trust. The rules are complex.

Similar CGT rules apply as wit IIP trust except that for CGT purposes for holdover relief.