If distributions are to be made to the beneficiaries, then instead of encashing within the trust (potentially incurring tax at 45%), portions of the bond can be assigned to beneficiaries who may be liable to tax at a lower rate. On the other hand, holding the same portfolio in an offshore bond wrapper defers any Income Tax and removes the need to report. They must also pay the tax due, possibly at the highest rates. However, taking advice on the best way to hold assets can dramatically reduce both the tax payable and the level of reporting involved.įor example, holding a discretionary investment portfolio directly will mean that every year the trustees must declare the Income Tax due on any dividends and the Capital Gains Tax due on any gains made. This is off-putting to some trustees as paying tax at the highest rate feels inefficient, and reporting sounds like a lot of effort. Trustees must declare the income and gains made to HMRC annually, and pay any tax that is due from the funds within the trust. The level of tax due depends on the terms and conditions of the trust, but many trusts are liable to tax at the highest rates – 45% Income Tax and 20% Capital Gains Tax (28% on property). The likely volatility of the overall portfolio should be suitable to the level of risk that the trustees feel is appropriate for the beneficiaries and the length of time that the money will be invested.Īssets held in trust may still be liable to Income Tax, Capital Gains Tax and Inheritance Tax. The assets should also be diversified, so that economic conditions that lead to losses on one investment are balanced by potential gains on other investments. For example, in both cases sufficient money should be held in cash to cover any annual expenses and the short-term needs of the beneficiaries. The basic principles of investing that apply to trusts are similar to those that apply to individuals. In this case it would not be suitable to invest in an asset which does not produce income, such as an investment bond, or an investment that accumulates the income, for example “accumulation” unit trusts. They will usually give an entitlement to any income produced to one beneficiary, before paying the capital to other beneficiaries upon their death. However, not all assets would be suitable when looking at the terms and conditions of the trust.įor example, some trusts require the trustees to maintain a fair balance between the income produced and the capital gains made by the investments. Trust deeds (or terms of the Will) generally allow trustees to invest in almost any asset. The Act states that trustees have a legal responsibility to review the investments from time to time, and when doing so they must “obtain and consider proper advice” from “a person who is reasonably believed by the trustee to be qualified to give it.” In Scotland, similar obligations are outlined in the Charities and Trustee Investment (Scotland) Act 2005. If they don’t, the trustees could be sued by the beneficiaries. The Trustee Act 2000 places a “duty of care” on the trustees to act with “such care and skill as is reasonable in the circumstances” when managing the trust on behalf of the beneficiaries. The basic principles of sensible investing.When doing so there are three key areas they need to consider: Trustees have a legal obligation to invest the trust funds wisely. Trustees are legally bound to administer the trust assets in line with its terms and conditions. Some people worry that trusts will be complex or expensive to run, but the cost and complexity of a trust depends heavily on how you invest the money within it. The trustees are legally bound to administer the assets in the trust in line with its terms and conditions. A trust is created when a person (the settlor) places money or assets in the hands of trustees to hold for the benefit of the beneficiaries. Trusts are used often in financial planning, particularly when planning to reduce Inheritance Tax, save money for children or provide for the vulnerable. Our technical expert Ian Dyall explains more about what a trust is and what trustees need to consider when investing. For example, if you were the executor of your mother’s or father’s estate, and they left money to all of their grandchildren who survive them and reach age 25, if any child is under that age, you are in fact the trustee of a trust.

Some people are trustees and don’t even realise it. Many people will at some point be involved with creating or administering a trust.

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