It is not
possible to go into a great deal of detail about trusts in a document such as
this. However, it is possible to
consider briefly why individuals might use a trust. Here we will look at two simple examples to
highlight two reasons:
- Simplicity and speed of administration
Control of an Asset
In simple terms,
a Trust allows an individual to pass beneficial ownership of an item to another
person, whilst not letting them control it directly. The best way to consider this would be to
look at some examples:
John and Janet’s
son William is going off to university shortly on a course that is going to
last six years. They want to buy a house
for William to live in whilst he is there.
If John &
Janet buy the house in their name then this would of course give them total
control over the property, as they own it.
However, if they were to die, it would in their estate for IHT purposes
and perhaps more importantly when it is sold, there could be a Capital Gains
Tax liability on the sale proceeds.
However, if they
use a trust to buy the property, but of course it must be an appropriately
worded trust, then:
- Assuming they are the trustees, they
will still exercise total control over the property. It does not belong to William, but he is
able to use it.
- If they die, then the property is not in
their estate for IHT purposes.
- If William is the “Life Tennant” and he
lives in the property, then when the property is sold, there is no Capital
Gains Tax to pay.
Of course the money in the trust can’t ever go back to John &
Janet, but if John set the trust up on his own, then Janet could be a potential
beneficiary of it. The trust property
can only be used to benefit the people named in the trust, but this could
include a wide range of people, not just William.
So then, by using a trust for this purpose, John & Janet have
retained control of the house, but have also benefited from some tax
Simplicity and Speed of Administration
We have already mentioned that when someone dies, their Executors
are not able to distribute assets from the Estate until they have received
Grant of Probate. To be granted Probate,
any IHT liability must first be settled.
This can cause delays of several months between deceased’s date of death
and the time when their family members can have access to some of the assets. This can cause complications in some circumstances.
One option is to utilise what is often referred to as a “Probate
Trust” and it can be seen as a useful way of moving assets out of the delays of
probate. For many such an arrangement
has become less attractive than it was prior to the 2006 Budget changes, but
this still has a place for some.
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