Want to know how to set up a trust fund in the UK? A trust fund is a structured legal arrangement that allows you to protect assets, support beneficiaries, and manage wealth effectively. For inheritance tax purposes, assets placed in a trust can fall outside of the settlor’s estate after seven years, potentially reducing the overall taxable estate.
This guide explains the steps involved, the different types of trusts available, and the key legal and financial roles required. By the end, you will understand how to create a trust fund tailored to your long term objectives.
- Setting up a trust fund in the UK involves choosing the right type of trust, appointing trustees, identifying beneficiaries, and drafting a legally binding trust deed. Professional advice is essential to ensure compliance and effectiveness.
- Different types of trusts, including bare trusts, interest in possession trusts, discretionary trusts, accumulation trusts and mixed trusts, serve different financial planning purposes.
- Trust funds can protect family assets, provide for future generations, and support vulnerable individuals, but careful planning and tax awareness are vital.
Understanding Trust Funds
A trust fund is a legal structure designed to manage and protect assets on behalf of beneficiaries. Historically rooted in English law, trusts have evolved into highly effective estate planning and asset protection tools.
Today, trusts are used to safeguard family wealth, control how assets are distributed, and manage income across generations. They can also assist with inheritance tax planning and protect assets from financial risks such as creditors or relationship breakdown.
Different types of trusts are taxed differently, so understanding how trust funds are taxed is an important part of long term financial planning.
What is a Trust Fund?
A trust fund is a legal arrangement where a trustee holds and manages assets for one or more beneficiaries according to instructions set out in a trust deed. The trustee may be an individual or a professional entity.
Trust funds can hold various assets including property, shares, investments and cash. They are often used to provide financial security for young children, manage wealth for future generations, or support individuals who may not be ready or able to manage assets independently.
Key Roles in a Trust Fund
Three core roles exist within every trust structure: the settlor, the trustee and the beneficiary.
The settlor is the person who places assets into the trust. They determine how the trust should operate and define its objectives.
Trustees are legally responsible for managing the trust assets. They must act in the best interests of the beneficiaries, follow the terms of the trust deed, manage investments prudently, keep accurate records, and comply with tax obligations.
Beneficiaries are the individuals or entities who receive the benefit of the trust. They may receive income, capital, or both, depending on the trust structure.
In certain situations, beneficiaries pay tax on income received from the trust depending on their individual tax position.
Types of Trusts in the UK
There are several types of trusts available in the UK. Each serves a different purpose and offers varying levels of flexibility and tax treatment.
- Bare trusts
- Interest in possession trusts
- Discretionary trusts
- Accumulation trusts
- Mixed trusts
- Settlor-interested trusts
- Non-resident trusts
Understanding these structures is essential when deciding how to set up a trust fund that aligns with your objectives.
Bare Trusts
Bare trusts are simple and transparent. The beneficiary has an absolute right to the trust assets and income once they reach adulthood, typically age 18 in England and Wales.
Bare trusts are often used to transfer assets to young people. Capital gains tax may not arise when assets are transferred into a bare trust for the intended beneficiary.
Interest in Possession Trusts
Interest in possession trusts give a beneficiary the right to income generated by the trust assets, while the capital remains protected.
The trustee must distribute income to the beneficiary as it arises. The beneficiary pays income tax on that income. In some cases, inheritance tax implications may arise depending on how the trust is structured.
Discretionary Trusts
Discretionary trusts offer flexibility. Trustees decide how, when and to whom distributions are made.
This structure is useful where beneficiaries may have changing needs or where asset protection is a priority. Trustees have discretion to manage income and capital responsibly in line with the trust deed.
Accumulation Trusts
Accumulation trusts allow trustees to retain and reinvest income, increasing the overall value of the trust over time.
This approach supports long term growth and can be beneficial when planning for future generations.
Mixed Trusts
Mixed trusts combine elements of different trust types. For example, part of the trust may provide income to one beneficiary while another part accumulates capital.
Each element is taxed according to its structure, so professional advice is particularly important when establishing mixed trusts.
How to Set Up a Trust Fund
Setting up a trust fund involves several structured steps to ensure it is legally valid and aligned with your financial goals.
- Decide on the type of trust
- Identify the assets to be placed into the trust
- Appoint trustees
- Identify beneficiaries
- Draft and execute a trust deed
Each step requires careful consideration and professional input.
Decide on the Assets
Trust assets can include property, cash, investments, land and shares. Assets must be clearly identified and valued before transfer into the trust.
Once assets are transferred, they generally cease to be personal assets of the settlor.
Appoint Trustees
Trustees must be reliable and capable individuals. It is often advisable to appoint at least two trustees to reduce risk.
Trustees should have sound judgment, financial understanding and the ability to manage responsibilities over the long term.
Identify Beneficiaries
Beneficiaries must be clearly defined in the trust deed. The trust should outline who benefits and in what proportions.
Clear drafting reduces the risk of disputes and ensures the settlor’s intentions are followed.
Draft the Trust Deed
The trust deed is the governing document of the trust. It sets out:
- The trust’s purpose
- The assets included
- The beneficiaries
- The trustees’ powers and responsibilities
- How income and capital are distributed
A legally drafted trust deed ensures the arrangement is valid and enforceable.
Legal and Financial Considerations
Trusts are subject to income tax, capital gains tax and inheritance tax depending on structure and activity.
Professional advice is essential to understand tax implications, periodic charges, and exit charges that may apply.
Inheritance Tax Implications
Trusts can trigger inheritance tax when assets are transferred. Some trusts may also be subject to ten year periodic charges or exit charges.
Tax treatment varies depending on the trust type and beneficiary structure. Understanding these rules is crucial for effective planning.
Costs Involved
Establishing a trust may involve legal fees. Simple trusts may cost between £1,000 and £1,500, while complex trusts can cost more.
Ongoing administrative and advisory costs should also be considered.
Professional Assistance
Professional legal guidance ensures the trust is correctly structured, compliant, and aligned with your intentions.
Managing a Trust Fund
Trustees are responsible for managing investments, distributing income, maintaining records and ensuring tax compliance.
Trustee Responsibilities
Trustees must act prudently, avoid conflicts of interest, and follow the trust deed strictly.
Managing Trust Income
Income must be distributed or accumulated in accordance with the trust deed. Accurate records must be maintained.
Reviewing and Updating the Trust
Trusts should be reviewed periodically to reflect changes in legislation or personal circumstances.
Benefits of Setting Up a Trust Fund
Trust funds provide asset protection, long term wealth planning and financial security for beneficiaries.
Protect Family Assets
Trusts can shield assets from creditors and family disputes while maintaining control over distribution.
Provide for Future Generations
Trusts ensure wealth is preserved and transferred according to defined intentions.
Support for Vulnerable Persons
Trusts can provide structured financial support for individuals who require additional care or protection.
Common Mistakes to Avoid
Inadequate Planning
Failing to define clear objectives can lead to unintended consequences.
Poor Trustee Selection
Choosing unsuitable trustees can undermine the trust’s purpose.
Ignoring Tax Rules
Non compliance with tax rules can result in penalties and financial loss.
Summary
Setting up a trust fund in the UK requires careful planning, professional advice and ongoing management. When structured correctly, a trust can protect assets, reduce inheritance tax exposure and provide long term financial security for beneficiaries.
By understanding trust types, legal responsibilities and tax implications, you can create a trust fund that aligns with your financial goals and supports your family’s future.