This article was first published in the April 2018 UK edition of Accounting and Business magazine.

Most people in the UK make no use of family trusts. But even those who do set up a trust to hold the family’s assets or run the family business are a shrinking band, with the number of trusts completing self-assessment tax returns for 2015/16 falling to 158,500 from 164,500 the year before.

Clients may need some education in the benefits of setting up a trust, although you must first navigate the tricky conversation about how they would like their families to inherit their legacies. A trust is a form of gift given via a trustee to a particular beneficiary, with the trustee (who could be an individual or a company) legally responsible for managing it. They are relatively inexpensive to set up. 

There are three main types of family trust, and clients need to consider which would suit them best – see box. As you discuss trusts with clients, you can make them aware of the benefits (and the drawbacks – such as asset transfer costs and loss of asset ownership – although the pros usually outweigh the cons). 

Tax savings

The most obvious saving is on inheritance tax. Beneficiaries of wills pay 40% inheritance tax on estates worth over £325,000. But if the assets are in a trust, no inheritance tax is payable.

A trust can also reduce personal tax liability. Let’s take the example of an individual with employment income of £35,000, which is taxed at 20% after deducting the personal allowance. This individual also has rental income of £10,000 from property and uses it to fund their child’s university fees. If the property is transferred into a trust, the individual may not need to pay personal tax on the rental income and will pay no capital gains tax.  

Asset protection

A trust secures assets for beneficiaries (in the absence of a trust or will, assets go to next of kin). Moreover, it will protect the assets from potential creditors of the beneficiaries or trustees. In many cases, a creditor cannot force a beneficiary or trustee into bankruptcy (or a company into liquidation) when assets are held in trust.

Avoiding probate

Probate can be an onerous, slow and costly process. Nor does it offer privacy. A family trust is outside the scope of probate and can be kept confidential because it is not publicly registered.

The merits of a trust will depend on individual circumstances, but it’s worth reminding clients of what is out there to secure their valuable assets for their next of kin. 

Muhammad Solaiman ACCA, accountant