Why recommend a Trust?

31 January 2020

Trusts can be complex, and many clients assume they are for the very wealthy. Julia Peake, Sanlam UK, discusses the benefits of trusts, the key considerations, and the rules around them.
Whether it’s mitigating Inheritance Tax (IHT), protecting and passing assets on while maintaining some control, or providing protection when someone is too young or incapacitated to handle their own affairs. Trusts can also be used to pass on assets via a will, and to avoid intestacy rules, making them great tools for financial planners.

Types of trust

Firstly, you need to consider whether the client needs a discretionary, interest in possession or a bare trust. For this article we will be concentrating on discretionary or bare trusts. Here are the key differences:



The trustees have full discretion over how to use and distribute the trust property to the beneficiaries. The beneficiaries have no right to the trust property.

The beneficiary has an immediate right to both the capital and income held in/produced from the trust.

Once the trust has been set up, the beneficiaries and their respective shares cannot be changed by the trustees.

Trustees hold the trust property until the beneficiary is 18 years old in England and Wales, or 16 in Scotland. At this point, beneficiaries can demand their share of the trust fund.

Discretionary and Bare trusts also have different tax rules:




Income Tax

The first £1,000 (standard band) of income is taxed at 7.5% for dividends and 20% for all other income. Where the settlor has created more than one trust, this will be divided and subject to a minimum of £200 per trust.

All income is taxed at the beneficiary’s marginal rate of income tax.

Income will be taxed at 45% or 38.1% for dividends after the standard band has been exceeded.

If the trust was set up by a parent for a minor (or if an existing trust is changed) after 9 March 1999, and if the gross income exceeds £100, it will be taxed as if it were the parent’s.

Capital Gains Tax

Gains are taxed at 20% (28% for residential property) after the trustee’s annual allowance of £6,000 (2019/20) has been applied.

Gains are taxed at 10% or 20%, depending on the beneficiary’s marginal rate of income tax. The annual allowance of £12,000 is available to set against any gains.

If the settlor created more than one trust, the annual allowance is divided up to a max of five, with a minimum of £1,200 per trust.

Inheritance Tax

Chargeable Lifetime Transfer regime.

Potentially Exempt Transfer regime.

Gifts and cumulative gifts over a seven-year period, exceeding the nil rate band (£325,000 2018/19) will be taxed at 20%.

10-year periodic and exit charges may apply.



The trustees have an obligation to consult the trust deed to see what assets are permissible. Sometimes the type of beneficiary, i.e. a life tenant, will mean income producing assets may be required. Where there is no such requirement, investment bonds could be the asset of choice because:

  • Non-income producing asset, so no reporting to HMRC until a chargeable event arises.

  • Segmentation adds flexibility and control.

  • 5% tax deferred cumulative withdrawals, beneficial for distributing assets.

  • Fund switches do not generate a tax liability.



Under Sections 4 and 5 of the Trustee Act 2000, trustees are required to ensure the investments are suitable and diverse for the beneficiary’s needs. It also states that "proper advice" is sought before investing, and this is where your skills as a financial planner comes into play.


Trusts are a great financial planning tools, helping clients, control and pass wealth down through the generations. Investment bonds are an ideal asset for trustees to use given their simple administration, 5% tax deferred withdrawals, and flexibility through segmentation. To discuss in more detail, and find out how Sanlam can help, please contact your Account Director.

This section of our website is intended for use by Professional Financial Advisers only. If you are a Professional Financial Adviser, please CONFIRM to continue. Please note past performance is no guide to future performance.

Please navigate to a service or product page and add the document to your brochure to continue.

Name your brochure
Your details
Thank you!

Your brochure is on its way.

Brochure Confirmation - your brochure is on its way.

We hope you find this useful.

The value of investments and any income from them can fall and you may get back less than you invested.