How to set up a Trust in the UK?

Setting up a Trust in the UK

Setting up a trust in the UK can be a great way to protect assets, provide for your family and support charitable causes. To access HMRC digital services during the trust setup process, it is necessary to create an agent services account (ASA). It involves creating a legal entity to hold and manage assets on behalf of beneficiaries, including new trusts created after a certain date and taxable trusts created before and after a particular date. Understanding the process and requirements for setting up a trust is key to making sure it is set up correctly and does what you want it to.

Choosing the Right Type of Trust

Before setting up a trust in the UK you need to decide what type of trust is best for you. Common types of trusts are revocable trusts, irrevocable trusts, charitable trusts and discretionary trusts. Each type has its own features and implications for taxation, asset protection and control of assets. Talking to a legal professional or trust expert will help you choose the right trust structure.

Choosing the Lead Trustee and Beneficiaries

Choosing trustees and beneficiaries is a key part of setting up a trust. The lead trustee is the main point of contact for HMRC and is responsible for updating trust details, receiving the Unique Taxpayer Reference, and registering the trust under the TRS. Trustees must also maintain accurate records of beneficial owners for compliance with HMRC regulations.

Trustees manage the trust assets and follow the trust terms. They have a legal duty to act in the best interests of the beneficiaries. Beneficiaries are the individuals or entities that will benefit from the trust assets according to the trust terms. Make sure you choose trustworthy and competent trustees and clearly define the beneficiaries to avoid any disputes or misunderstandings in the future.

Trust Deed

Once you have decided on the type of trust, trustees and beneficiaries the next step is to draft the trust deed.

The trust deed is a legal document that sets out the terms and conditions of the trust including the objects, powers of the trustees, distribution of assets and any specific instructions or restrictions. The trust deed should be drafted carefully to make sure it reflects your wishes and complies with UK legislation.

Register

Once the trust deed has been drafted and signed the final step in setting up a trust in the UK is to register the trust with the relevant authorities. During the registration process, existing government gateway IDs must be linked to the new agent services account to maintain access to established services. Trustees will need a separate government gateway user ID specifically for the trust, distinct from their personal government gateway user ID used for other HMRC online services.

Trusts that generate income or hold assets such as property will need to be registered with HM Revenue and Customs (HMRC) for tax purposes. Make sure you comply with all the legal and regulatory requirements so the trust runs smoothly and does what you want it to.

You may need to review the trust structure and provisions from time to time to make sure it remains relevant and effective.

Types of Trust you can set up in the UK

Bare Trust

• Also known as a simple trust.
• Beneficiaries have immediate and absolute entitlement to both the income and capital in the trust.
• Settlor transfers legal ownership of assets to a trustee who manages them on behalf of the beneficiaries.
• Used to transfer assets to minors or in simpler inheritance arrangements.

Discretionary Trust:

• Trustees have full discretion over how the trust income and capital is distributed among the beneficiaries.
• Beneficiaries do not have a fixed entitlement but the trustees must follow the trust deed.
• Used for asset protection, to provide for vulnerable beneficiaries or to manage complex family situations.

Life Interest Trust:

• One or more beneficiaries receive the income from the trust for their lifetime.
• Capital reverts to another beneficiary or beneficiaries upon the death of the life tenant(s).
• Provides security for the life tenant(s) while preserving assets for future beneficiaries.
• Used in estate planning to balance the needs of different beneficiaries, such as a surviving spouse and children.
• Life insurance policies can be included in Life Interest Trusts to ensure that death benefits pass to the trust efficiently.

Charitable Trust:

• Set up to benefit specific charitable purposes, such as education, health or poverty relief.
• Tax advantages as charitable trusts are exempt from certain taxes.
• Trustees must ensure the trust assets are used only for charitable purposes.
• A way to leave a lasting legacy and support causes that are important to you.

Special Needs Trust:

• Also known as a disabled trust.
• Set up to provide for the long term care and support of a person with disabilities.
• Protects the beneficiary’s entitlement to means tested benefits.
• Allows family members to contribute assets without affecting the beneficiary’s access to support services.
• Ensures the individual’s unique needs are met even after the settlor’s death.

Taxable Trusts

Taxable Trusts Overview

Taxable trusts are those that generate income or capital gains that are taxable. These trusts must register with HMRC through the trust registration service if they meet certain conditions related to their tax liabilities. Registration ensures tax compliance and accurate reporting of income and gains.

Since 2017 UK trusts that are subject to the following taxes have been required to register under the TRS:

• Capital gains tax
• Income tax
• Inheritance tax
• Stamp duty land tax
• Stamp duty reserve tax
• Land and buildings transaction tax (in Scotland)
• Land transaction tax (in Wales)

Non-Taxable Trusts

Non-taxable trusts are trusts that are not subject to income tax or capital gains tax. This means any income generated within the trust or gains realised on trust assets are not taxable. Non-taxable trusts created after a specific date must be registered within a specified timeframe to comply with legal requirements.

Examples of non-taxable trusts include charitable trusts where the trust is set up for charitable purposes and the income is used for charitable activities. Pension trusts are also non-taxable as the income within the trust is intended to fund the beneficiaries’ retirement and is not taxable until it is paid out.

Non-taxable trusts can be tax efficient as they can help reduce the tax liability of the trust beneficiaries. By sheltering income and gains within the trust beneficiaries can receive distributions without incurring further tax.

Please note the tax treatment of trusts can vary depending on the type and purpose of the trust. Seek advice from a tax advisor or solicitor to ensure you understand the tax implications of any trust you set up or become a beneficiary of.

Trust Registration – Example Situations

Some situations that may be a registerable trust under TRS include holding property for the benefit of another person, managing assets on behalf of others or having a legal obligation to administer assets for the benefit of someone else. Please seek legal advice to determine if registration is required. It is also important to comply with Money Laundering Regulations when registering a trust. Further guidance on trust registration can be found on the HMRC website.

Jointly Owned Property

A property owned jointly by spouses, civil partners or unmarried cohabitees can have a declaration of trust in place to show they own the property in unequal proportions. This is an exemption and not registerable. Since the co-owners are also the trustees and beneficiaries the situation does not require registration. You can find more information about this exemption on the GOV.UK website.

Solely Owned Property

In this scenario a declaration of trust is put in place to show the beneficial ownership of a property by the owner and another person, usually a spouse or civil partner. This is common when the property is a rental and the spouses want to split the rental income. The owner is the trustee and both the owner and their spouse or civil partner are the beneficiaries.

Since one of the beneficiaries is not a trustee this is outside the joint property ownership exemption and must be registered as a non-taxable trust. This declaration shows the ownership and distribution of income from the property.

Property Left in a Will as a Life Interest

A life interest, commonly found in will trusts, allows a surviving spouse or civil partner to live in a property for the duration of their life even though they do not own the property outright. It is important to provide necessary documentation, such as proof of registration, to the relevant person to comply with regulations and maintain trust. This is often specified in the deceased person’s will. If the life interest trust ends within two years of the person’s death it is exempt from registration.

However if the surviving spouse continues to live in the property beyond two years it becomes registerable two years after the death of the first spouse. This type of trust is a common estate planning tool and allows the surviving spouse to have a home for the rest of their life.

Bank Accounts Held for Children

Bank accounts holding cash for a minor child or someone lacking mental capacity are not registerable. See GOV.UK for more information.

Premium Bonds Held for Children

HMRC have clarified that premium bonds in a minor child’s name do not create a trust and are not registerable. So they are not subject to trust tax rules.

Why choose us for Trust Formation Services?

• We offer bespoke trusts to suit your needs and objectives.
• Our team will guide you through the process with transparency, compliance and confidentiality throughout.
• Trust formation services include advice on the right type of trust structure for asset protection and estate planning.
• We will prepare the necessary documents including trust deeds and investment guidelines.
• Our expertise and attention to detail will help you create a trust that matches your financial goals and gives you peace of mind for the future.
• By choosing our trust formation services you can benefit from our knowledge of the UK legal and regulatory requirements.
• Our services ensure compliance with ‘making tax digital’ regulations, including the need for an Agent Services Account (ASA) to access various HMRC services.
• We build long term relationships based on trust and integrity so your interests are always protected.
• Contact us today to discuss how we can help with trust formation services tailored to your individual circumstances.