Trusts in the UK fall under the Trustee Act 2000 which regulates the duties of the Trustees in English Trust Law, though English Trust Law dates back a lot longer than that. English Trust Law is actually the original and foundational trust law in the world dating back to the 12th Century during the crusades when lords leaving the country would leave their castles and lands in trust to another to look after until their return only to find a fight on their hands when they returned to get their property back.
UK trust law was amended in April 2010 to allow more flexibility. Whereas before there was a restriction on the accumulation of trust income meaning that income had to be distributed to the beneficiaries after a set period, trusts were now allowed to roll the income through the lifetime of the trust. The lifetime of a trust was also expanded from 80 to 125 years. This brought the UK up to date with trusts available in other jurisdictions. Trusts established before this new legislation will not automatically have the new rules apply and so persons with older trusts should seek advice whether to set up new trusts to take advantage of new legislation.
Advisors to geographically diverse families may normally recommend that a trust be established in a major financial centre with strong legal and regulatory framework. The UK has long been a choice for this reason as it offers this along with professional expertise and an efficient banking system which has an understanding of trusts.
The UK offers a wide variety of Trusts;
- Bare Trust – each beneficiary has an immediate right to both capital and income
- Interest in Possession Trust – beneficiaries have a right to all trust income
- Discretionary Trust – Trustees choose whether and to whom to pay
- Accumulation Trust – Trustees re-invest
- Mixed Trust – combines different types of Trusts
- Settlor-interested Trust – the Settlor may continue to benefit from assets in the Trust
- Parental Trust for Children – set up for children under the age of 18 by their parents with special tax rules
- Non-resident Trust – UK trust, but managed from abroad
- Vulnerable Trust – set up for disabled people or children who have lost a parent with special tax rules
A discretionary trust is of particular interest in the offshore environment as the trustees are the legal owners of any assets. This provides a level of distance between the original Settlor and Potential Beneficiaries meaning that tax implications arising from the existence of the trust may be beneficial.
Discretionary Trusts in the UK are liable for Income Tax on income and often capital received by the trust and it is the Trustees responsibility to declare and pay this. Barring the first £1,000 which has a special rate the Income Tax rates are between 42.5% – 50% although special rules apply to Trusts with vulnerable beneficiaries. Tax rules surrounding trusts are complex and it is advisable to seek expert advice based on individual circumstances
The UK trust laws have been replicated in many jurisdictions as these are considered a firm reputable base for Trust law. This is the reason that UK trusts are still popular today.