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Guide to Trusts

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Guide to Trusts FOR FINANCIAL ADVISERS ONLY TECHNICAL GUIDE TO TRUSTS INTRODUCTION All our trusts are ‘Pre-owned The taxation information set Assets Tax’ (POAT) friendly. They out in this guide is based on our This booklet is intended as a are all governed and construed understanding of the general practical guide for advisers who are according to the law of the Isle of application of Her Majesty’s considering the use of an offshore Man. Therefore, the courts of the Revenue and Customs (HMRC) plan in conjunction with a trust to Isle of Man shall have exclusive practice as at March 2021. assist the planning and arrangement jurisdiction to hear all disputes of their client’s investment affairs. concerning these Trusts. The contents of this booklet and In particular, it will be of use to any trust wording provided by us those wishing to enhance the Our trusts are offered free of charge should not be used as the basis of benefits offered through the range to our clients and ongoing support advice given to individual clients of products designed to meet the is provided by our Technical Team without independent legal advice needs of both UK domiciled and who will assist and provide support being sought. We cannot be held non-UK domiciled clients. in respect of any trust and tax responsible for any actions taken related queries. or refrained from being taken Significant and controversial by individuals as a result of the changes to the Inheritance Tax information provided in this guide. treatment of trusts were contained within Schedule 20 of the Finance Act 2006. Subsequently, since 22 March 2006, trusts may be broadly divided between those trusts which come under the mainstream Inheritance Tax regime for ‘Relevant Property’ trusts and those which do not. ‘Relevant Property’ trusts are taxed as ‘Discretionary Trusts’. The changes were made to ensure that the Inheritance Tax treatment of trusts were streamlined so that all trusts are treated in the same way, with some limited exceptions. As a consequence of these changes, we offer the choice of establishing a trust on either a ‘Bare Trust’ basis or a ‘Discretionary Trust’ (flexible) basis, in order to accommodate the needs of a wider range of investors. This guide will help advisers to understand not only the implications of choosing a particular trust but also to understand the reasons behind why an individual may need to create the trust on either a bare or discretionary trust basis. 1 WHAT IS A TRUST? the exception of the Discounted classes of discretionary and named Gift Trust, our trusts do not beneficiaries. Alternatively, if a Put simply, a trust is a legal automatically appoint the settlor client establishes a bare trust, arrangement where property/ as a trustee. However, the settlor there will be no discretionary assets are held by someone, ‘the can appoint him or herself as a beneficiaries and instead the settlor trustees’, on behalf of someone trustee and additional trustees will appoint one or more absolute else, ‘the beneficiaries’, subject to could include family friends, family beneficiaries. The differences the terms of the trust. members, professional advisers or between these three types of a trust corporation. Beneficiaries beneficiary are explained next. WHO ARE THE PARTIES TO A may also act as trustees although TRUST? care should be exercised to avoid Discretionary any potential conflicts of interest. ‘Discretionary beneficiaries’ is the Settlor name given to beneficiaries of a The settlor is the provider of the When accepting the role of trustee, discretionary trust. They may only funds for the trust. A settlor can it is important that the trustees fully benefit from the trust funds at also be a beneficiary of his or her appreciate the terms contained the trustees’ discretion and could own trust although this would within the trust deed and the legal also be excluded from benefiting represent a ‘gift with reservation’ principles which govern the trust. at a future date. The death of a and therefore would generally The Isle of Man Trustee Act 2001 discretionary beneficiary does make the trust ineffective from updated the statutory powers and not have any Inheritance Tax an inheritance tax perspective. duties of trustees contained in implications for the trust. Although some of our trusts allow the Isle of Man Trustee Act 1961. for joint settlors, this option should Although the full provisions and Named (where applicable) only be chosen where both parties implications of this Act are outside A named beneficiary has an are the providers of the funds, or the scope of this guide, under this entitlement to income but joint plan owners in the case of an Act trustees have a statutory duty not capital. In the event that existing plan. of care when carrying out their the trustees do not make an duties as well as a duty to act in the appointment of capital during the Trustees best interests of the beneficiaries. lifetime of the trust, the trust fund Trustees must be at least 18 years would default to those individuals of age, of sound mind and should Beneficiaries who are named in the trust deed be not bankrupt. Beyond that, as These are the beneficial owners of as named beneficiaries in the the name implies, trustees should property held within the trust. If a percentage shares stipulated in principally be people whom the client establishes a discretionary the trust deed. settlor feels can be trusted. With trust, the trust will appoint both Absolute An ‘absolute’ beneficiary is the name given to beneficiaries of a bare Trust. An absolute beneficiary will have an outright entitlement to capital from the trust and is able to demand payment of their share of the trust fund once they reach the age of majority. If an absolute beneficiary dies, the portion of the trust fund belonging to him or her forms part of their estate for Inheritance Tax purposes. Therefore, after the beneficiary’s death, his or her share must be passed to his or her estate to be distributed in accordance with the terms of the will or via the laws of intestacy in their particular jurisdiction. If a client establishes a bare Trust it is not possible to change the absolute beneficiaries. 2 WHY USE A TRUST IN As long as there is a surviving settlor’s estate for Inheritance Tax CONJUNCTION WITH AN trustee, proceeds of the plan purposes depending upon the type OFFSHORE PLAN? can therefore be paid to the of trust chosen. beneficiaries without delay. There are various reasons why As you will see later in this guide, an individual might wish to To control family assets we offer a range of trusts which place their plan into a trust Trusts have an advantage over can be used to mitigate UK or invest through a trust into an outright gift as the donor inheritance tax. a plan. The most common can exercise a degree of control reasons are listed below: and can still have access to Inheritance Tax planning for non- capital in some limited cases. UK domiciled individuals To avoid Isle of Man Probate Many investors wish to set aside An individual who has been a Any plans issued in the Isle of Man assets for the future benefit of long term resident of the UK for are classed as Isle of Man assets members of their family whilst income tax purposes but is not and Isle of Man Probate will be restricting beneficiaries’ access UK domiciled or deemed UK required on the death of the last until it is thought appropriate domiciled may wish to consider plan owner before either proceeds that those assets should be the establishment of an Excluded can be paid out or the plan is distributed. If the plan is written Property Trust in which to hold re-registered into the name of in a discretionary trust, the their offshore plan. the new owner. Grant of Probate/ trustees can be instructed to hold Letters of Administration refers to the plan until the beneficiaries This is because non-UK domiciled the situation where, on a person’s reach a certain age or for future individuals who are likely to remain death, the court must confirm that children or grandchildren. in the UK in the medium to long the executors are entitled to deal term can avoid future liability to with the deceased’s estate before Inheritance Tax planning for UK Inheritance Tax on non-UK assets any assets can be distributed. domiciled individuals if those assets are placed in trust For individuals who are domiciled prior to becoming resident in the If a plan is placed into trust, legal or deemed domiciled in the UK for 15 out of the last 20 tax ownership lies with the trustees UK, Inheritance Tax applies to years (i.e. whilst the individual is and Isle of Man Probate will not their worldwide property and still non UK domiciled). be required on the Settlor’s death. would therefore include offshore Therefore, this can help to provide investments. By arranging for the The trust assets will remain privacy, as unlike trusts, Grant of offshore plan to be held under trust, excluded property for as long Probate/Letters of administration all or part of the proceeds from as they remain in trust and are records are available to the public. the plan may be removed from the situated outside the UK (e.g. an offshore plan. If an individual wishes to establish an Excluded Property Trust then please refer to our Excluded Property Trust Guide. INTRODUCTION TO INHERITANCE TAX Where an individual is UK domiciled or deemed UK domiciled for Inheritance Tax (IHT) purposes, their worldwide assets are potentially subject to IHT at a rate of 40%.
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