UK Law and Practice Contributed by: Roger Gherson, Alfred Gherson, Lisa Uttley and David Tipping, Gherson Solicitors
The use of trusts for tax planning has been curtailed. What remains largely is as follows. • Discretionary trusts are the most widely used UK estate-planning vehicle, offering flexibility, asset protection and multi-generational succession governance. They fall within the relevant property regime, attracting entry charges (up to 20%), ten- year periodic charges (up to 6%) and exit charges. Trust income is taxed at 45% (39.35% on divi - dends; rising to 47% on savings/property income from April 2027) and trust CGT at 24%. • Other key structures include interest in possession trusts (life interest trusts for blended families), bare trusts (for grandchildren), bereaved minor trusts (excluded from relevant property charges) and discretionary will trusts, with section 144 “reading back”, meaning that on a transfer within two years of death, the distribution is taxed once, as if the testator had always intended it. 3.2 Recognition of Trusts Trusts are fully recognised and deeply embedded in the law of England and Wales. The trust concept of separating legal ownership (in the trustee) from beneficial ownership (in the beneficiaries) is a creation of English equity. Foreign trusts are recognised through the Recogni - tion of Trusts Act 1987, which implements the Hague Convention on Trusts, ensuring that trust property constitutes a separate fund and that trustees may act in their capacity across jurisdictions. Practical considerations include significant tax costs (relevant property IHT charges, 45% trust income tax rate, 24% CGT rate), mandatory Trust Registration Service registration, the removal of non-dom trust pro - tections from April 2025 and potential non-recognition in civil law jurisdictions with forced heirship rules. 3.3 Taxation of Trusts, Foundations and Similar Entities Located in Other Jurisdictions The location where a trust is established or adminis - tered is relevant to the extent that it determines the trust’s residence. For the purposes of income tax and CGT, a trust is deemed to be resident in the UK if all
the trustees are UK resident and not resident in the UK if all the trustees are non-resident. Where some, but not all, of the trustees are UK residents, the trust will be resident if the settlor was resident when the trust was created. Where an individual creates an overseas trust, this may engage the Transfer of Assets Abroad (“TOAA”) legislation. If the settlor is UK-resident and has the power to enjoy the income of the trust, any income arising within the trust will be deemed to be income of the settlor. Further, even if that provision is not engaged (eg, the settlor is deceased or is not a UK- resident), any benefits received by UK-resident ben - eficiaries out of the trust may give rise to a charge to income tax matched against the income of the trust. If a settlor of a non-resident trust is a UK-resident, any chargeable gains arising in the settlement are taxable on the settlor. If the settlor is not a UK resident, capi - tal payments made from the trust to any UK-resident beneficiaries are matched against chargeable gains arising in the trust. The matched gains are then tax - able on the UK-resident beneficiaries who receive the capital payments. 3.4 Tax Consequences of Fiduciary and Beneficiary Roles It is quite common that the settlor will also be a trustee of the trust they have created. There are no specific tax consequences arising from that arrangement. If the settlor is not expressly excluded from benefit - ting from the trust, the income arising within the trust may be attributed to the settlor under the so-called ‘Settlements Code’. Further, any property distributed to the trust is likely to be a ‘gift with reservation of ben - efit’ and therefore be deemed to remain a part of the settlor’s estate on their death for the purposes of IHT.
4. Family Business Planning 4.1 Asset Protection
Asset protection planning is a central concern for HNW individuals and family offices in the UK. The most widely used and most popular vehicle for asset protection in England and Wales is the discretionary
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