Lowes Magazine Issue 115

INVESTMENT

How we help clients

Interest in Possession Trusts These are trusts where individuals can receive the income from assets (an income beneficiary) but do not have access to the assets themselves. The trustee passes on all trust income to the beneficiary as it arises (less any expenses). As an example, someone may put assets in an Interest in Possession Trust which, after they die, pays the income from the assets to their spouse and after the spouse dies the assets go to named children. Discretionary Trusts Discretionary Trusts, as the name suggests, allows for some control over assets and payments. The trustees can make certain decisions over how trust assets are distributed and who to, depending on the trust’s beneficiaries. This can include what gets paid out (income or capital), how often payments are made, and any conditions imposed on the beneficiaries. Discretionary trusts are sometimes set up to put assets aside for beneficiaries who are not capable or responsible enough to deal with money themselves. Other trusts, such as discounted gift trusts and flexible reversionary trusts can enable the settlor to take payments from the trust and have certain aspects of control while also taking advantage of IHT benefits. Taxation Tax treatments differ depending on the type of trust and considerations need to be made for Income Tax, Capital Gains Tax, and Inheritance Tax. In some cases, money is taxed when placed into the trust, and others have a tax review and charge applied every 10 years. As can be seen, trusts are a complex area and this can only be a high level look at them. Which trust is used (or more than one, as trusts can be combined) will very much depend on individual circumstances and what the settlor(s) is trying to achieve for themselves or their beneficiaries. They can be a useful tool for intergenerational financial planning as well as tax planning, but I would recommend anyone considering putting money in a trust first consults an Independent Financial Adviser to ascertain which may be the most appropriate for their needs.

LOWES CONSULTANT John Walton outlines one of the situations where a client may require advice and Lowes is able to help. Our discussions with clients around

leaving money to their beneficiaries, can revolve around a range of issues. These include reducing their estate’s liability for inheritance tax, or other complex areas, such as investing for a child’s future in a tax efficient way, providing their partner with a lifetime income but passing on the assets to children, and putting money aside for children but wanting to retain some control over it. Likewise, some want to gift the money outright; some want to derive an income from or have access to it in the short term. Trusts can provide a solution to these issues but they can be a difficult area to navigate. There are several types of trusts used when planning our finances but the three most commonly used are Bare Trusts, Interest in Possession Trusts, and Discretionary Trusts. Each allows for a different level of access by the person setting up the trust (the settlor) as well as different tax treatments in respect of tax paid by the person paying the money, and the beneficiary, the person(s) receiving the money or income from it. Trusts are managed by trustees, which can be the settlor(s) or independent individuals, who look after the assets and investments. Bare Trusts This is the simplest form of a trust, with assets held by a trustee for the benefit of the beneficiary. They are often used by parents and grandparents to pass money down to children of the family. As money paid in is classed as a gift, which is a Potentially Exempt Transfer (PET) for tax purposes, if the settlor lives for seven years after the gift is made, it sits outside their estate for inheritance tax (IHT) purposes. As a gift, the child has an absolute right to the funds and can access them when they turn 18. Before then the parents, or grandparents, look after the funds as trustee(s) and invest the funds accordingly. The funds can also be accessed before the child turns 18 if required for the benefit of the child, such as for school fees.

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