UK Law and Practice Contributed by: Ros Bever, Claire-Marie Cornford, Helen Clarke and Ashley Hill, Irwin Mitchell
3. Trusts, Foundations and Similar Entities 3.1 Types of Trusts, Foundations or Similar Entities High net worth individuals typically use trusts or cor - porate entities such as FICs (or in some cases FLPs) for wealth structuring. Charitable bodies (with UK charitable status) benefit from generous tax reliefs, and gifts to such bodies are exempt from IHT. The recent and forthcoming significant changes to the UK IHT regime will have a bearing on the efficacy of using certain types of trust (such as those hold - ing property, which were originally excluded from the scope of UK IHT, and those holding assets, which previously qualified for 100% BPR or APR). 3.2 Recognition of Trusts Trusts in the UK as a means of separating the legal and beneficial ownership of property are a concept rooted in property law and the related obligations and equitable principles, overlaid by a statutory frame - work. Notably: • the Trustee Act 2000 sets out trustees’ duties, powers and protections in England and Wales, including the duty of care and rules on delegation; • the Trusts of Land and Appointment of Trustees Act 1996 makes particular provision in respect of land held in trust; and • the Trustee Act 1925 remains of relevance – for example, in relation to the provision for the basis and manner of appointment and retirement of trustees. Scotland and Northern Ireland have their own statu - tory frameworks. Distinct income tax, CGT and IHT rules apply to trusts, with some variation depending on the particular type of trust (with trusts qualifying as disabled trusts also qualifying for special tax treatment, for example).
Many modern trusts (including trusts created by a will) include express provisions that extend the trustees’ statutory powers or relax their statutory obligations. Trusts have traditionally been widely used in the UK to hold and pass on family wealth, with a degree of control and protection from third-party claims. 3.3 Tax Considerations: Fiduciary or Beneficiary Designation The residence status of a trust is relevant for tax pur - poses and is determined by reference to the residence status of individual trustees or, in some scenarios, to that of the settlor at the time of funding the trust. It is possible, therefore, for a UK resident acting as a trustee of a non-UK trust to make the trust UK-resi - dent for tax purposes. It is common for the settlor of a UK trust to also be one of the trustees – the following should be noted: • this does not itself present any tax issue; • where a UK resident is both the settlor and a beneficiary or potential beneficiary, or where the settlor’s own minor children are beneficiaries, the trust is treated as “settlor interested” in certain tax contexts (and the income of the trust may be attributed to the settlor); and • if the settlor is a beneficiary or potential beneficiary of a trust, the funds settled will usually be treated as if still forming part of the settlor’s estate for UK IHT purposes under the “gift with reservation of benefit” rules. Rules concerning structures facilitating the transfer of assets abroad, including offshore trust structures, may also serve to attribute income from transferred assets to a UK-resident settlor. The replacement from 6 April 2025 of the remittance basis and of previous rules relating to “protected for - eign source income” (PFSI) has tax implications where there are UK-resident beneficiaries of an offshore trust. Transitional relief may apply where distributions to beneficiaries can be matched to pre-6 April 2025 income and gains.
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