Types of Trust

Chris Gillman

Chris Gillman –
Trust Specialist

Trust can come in a wider variety of forms, with a wide range of intents and sizes.  They can range from simple bare trusts to complex discretionary trusts and to interest in possession trusts.  Trusts can be both explicit, defined by deed or within a Will, or they can arise as a result of legislation, such as in respect of services charges held by a property management company.  They can be worth a few thousand pounds or they can be worth billions.  

Whatever type of trust you have, or are considering, Menzies, with its specialist trust team led by Chris Gillman from our centre of excellence in Leatherhead, is well placed to help and advise you. 

What are Discretionary Trusts?

The heading “discretionary trust” covers a wide range of trusts and is probably the most common form of trust.  In short, it is a very flexible form of trust that allows the trustees to apply the income and capital of the trust for the beneficiaries at their (the trustees’) discretion. 

In practice, these trusts come in many forms and can range from Accumulations and Maintenance Trusts (which can no longer be created and, as such, are increasingly rare), to 18-25 trusts, which effectively replaced them, to straight forward discretionary trusts simply designed to protect their assets and their beneficiaries. 

A common example of a discretionary trust is one created by parents wishing to set aside excess wealth to benefit their children and any future descendants.  They may initially nominate themselves as trustees and may distribute trust assets to their children in times of financial need such as for education, health reasons, to fund business start-ups or to provide a leg-up on the housing ladder.  Once they are older, they may pass on trustee responsibility to other trustees who will continue to act in the interests of the beneficiaries.  There may be grandchildren and the trust assets could be used to pay their school fees or set them up with properties in the future.  Depending on the size of assets in the trust, the trust could ultimately provide for multiple generations of descendants. 

What are Interest in Possession Trusts

Interest in possession trusts, also known as life interest trusts, are a type of trust where all the income of the trust, after expenses, must be paid out to a nominated beneficiary or beneficiaries – known at the ‘Life Tenant(s)’.  The trustees have no discretion regarding these payments and cannot reinvest the income within the trust.  Trusts can be set up so that the right of income only exists until a certain age or a specific date, so may not last a lifetime.  The life tenant has no right to the capital of the trust, but the trust may be drafted to allow capital distributions at the discretion of the trustees. 

When the life tenant’s interest in the trust comes to an end, the trust assets pass to ‘remaindermen’ who are the ultimate beneficiaries of the trust; the trust may provide for this interest to remain on trust or the remaindermen might receive the funds outright.  It may be possible for distributions to be made to them, before the life tenant’s interest comes to an end, and this is at the discretion of the trustees. 

These trusts are commonly used on death when they are set up to provide for a spouse for the rest of their lifetime, with the assets then passing to children after the spouse’s death.  It avoids the transfer of all the assets to the spouse and hence the risk they may be split in the event of a remarriage or indeed to ensure these assets ultimately pass to your children from your first marriage, while providing for your second spouse until their death. It also avoids the risk of all assets being used up so they cannot be left to future generations.  They are normally only used when there are sizeable assets to ensure adequate income for the life tenant, although the trustees still have the discretion to distribute capital to the life tenant if required. 

What are Offshore Trusts? 

Offshore trusts are trusts that are not tax resident in the UK and will, by definition, have at least one trustee outside of the UK.  If all the trustees are UK resident, then the trust would be treated as a UK trust.  The residence of the trust determines its treatment for UK tax purposes with offshore trusts being subject to a materially different regime to offshore trusts. 

An offshore trust will often be an excluded property trust.  This is a trust that was created by individuals neither domiciled nor deemed domiciled in the UK at the time of creation.  All foreign property of the trust is treated as excluded property and is outside the scope of UK inheritance tax.  Excluded property trusts can be subject to UK income and capital gains tax in a number of different circumstances.  

Anyone coming to the UK with sizeable assets and an intention to stay beyond the short term should consider creating a trust for some or all of their foreign assets, in order to keep them outside the UK tax net. 

Legislation involving offshore trusts is complex and obtaining professional advice is recommended. Menzies can provide advice regarding setting up offshore trusts, provide advice on the tax implications of the trusts, complete regulatory requirements for the trusts, and provide advice regarding any winding up of any overseas trusts.  

What are Bare Trusts?

Bare trusts are the simplest form of trust and are simply a nominee arrangement where a trustee holds property on behalf of a beneficiary.  Trustees must act in accordance with the beneficiary’s wishes and the beneficiary is absolutely entitled to the trust’s property and income at any time when they are over the age of 18 (16 in Scotland). 

These are commonly found whenever parents hold bank accounts for their children.  A parent can act as bare trustee and hold the money for the child.  The child has the right to the income and the underlying assets of the account when they are 18. 

They are different to discretionary trusts as, in discretionary trusts, the beneficiaries have no absolute rights to the trust assets, whereas in bare trusts, beneficiaries have absolute rights to the trust assets and the trustee must act in accordance with their instructions.  Due to beneficiaries having an absolute right to the trust’s property when they are 18, these trusts are not normally used for trusts with significant holdings. Parents may prefer a discretionary arrangement so that control of all the property is not given to children at the age of 18. 

Important follow-up reading

Trust best practise

If any of these trusts sound like they may be of use to you, please do get in touch.