What are the different types of Trusts?

07 May 2021

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By Gemma Thornell, Assistant Manager

In order to adhere to the various tax compliance obligations affecting trusts, trustees should take a number of factors into consideration.

Each type of trust is taxed differently. Trusts are generally divided into three types:

Discretionary Trusts

Trusts such as these are the most flexible. In certain circumstances, for instance, when a Trust has received income, made capital dispositions, or made income or capital distributions the Trustees are obliged to submit a tax return. Maintaining annual accounts for the trust is also recommended. In addition, inheritance tax returns are required at each 10 year anniversary and when assets are distributed to beneficiaries under certain circumstances.

Life Interest/Interest in Possession Trusts

During a beneficiary’s lifetime, he/she may use trust property and receive all income generated; thereafter the trust property is transferred to the next beneficiary. Under most circumstances, Trustees must submit a tax return to HMRC on a yearly basis. However if the following conditions are met, i.e. a life tenant only receives income from his or her property if it is occupied by the beneficiary then return may not be necessary. Maintaining annual accounts for the trust is also recommended. A 10-year anniversary inheritance tax return may also be due if assets are transferred into the trust after 22 March 2006.

Bare Trusts

Trusts of this type are the simplest – we like to think! Under nominee arrangements, a trustee holds property as legal owner on behalf of a beneficiary. The trustee must follow the beneficiary’s wishes, for example, when a beneficiary is under the age of 18, a trustee, who is of legal age, will act on their behalf. Trustees have no reporting requirements since the beneficiary declares income from the property on his/her personal tax return, there is, therefore, no need for the trustees to report income from the property. 

Need more help with your Trust?

 As well as offering ongoing tax compliance services, our team can conduct a one-off compliance review of your trust. This would involve reviewing a Trust Deed or any subsequent Deed of Appointment to ensure the right rules are being used for taxation of the trust along with the inheritance tax reporting. Our team can also advise on tax planning opportunities available to minimise tax, both for existing trusts and any new trusts.

Get in touch

If you would like to find out more information on how we can help you, don’t hesitate to get in touch. Our knowledgeable team are always available to chat & talk through your options!


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