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Setting up a trust

By Jamie Gayton

Aspectus Financial Management

Putting your exit proceeds into a trust for your children can help protect your money and your family

SELLING a business for millions of pounds gives you the opportunity to bring financial security to your whole family for the rest of their lives.

Alongside your foreign travel and fine wines, you can ensure that your hard-earned wealth provides your children or grandchildren with stellar education opportunities or help onto the property ladder. But it’s not quite as simple as handing over regular cheques to your eager offspring.

“Some entrepreneurs don’t want to give their children immediate access to lots of money because they want them to make it on their own,” says Tony Müdd, Divisional Director, Development & Technical Consultancy at St. James’s Place. “There may also be nervousness over their children’s choice of spouse and what a divorce would mean to the family wealth. In addition, there is uncertainty about how their children will spend the money. Will it be wasted on fast cars or worse?”

To ensure more control over where the money will go you could consider setting up a trust for your children or grandchildren. These can also help with Inheritance Tax planning as gifts can be exempt if you survive for seven years after making them.

Bare trusts

You could consider a bare trust where the trustees are the legal owners of the assets, holding them for the beneficiary. They can take control of these at age 18 in England and Wales or 16 in Scotland. The main benefit is that a transfer into a bare trust is potentially exempt from Inheritance Tax.

“It doesn’t provide much control for older kids because if they want the money then there is nothing you can do to stop them,” says Tony.

Discretionary trusts

Discretionary trusts are another option and the most used in financial services. “It gives you much more control including where the trust money is invested, how any capital or income distribution is made. The beneficiaries don’t have any rights,” Tony explains.

“You could set up the trust stating that a beneficiary has a right to an income at 30 and capital at 40 but why tie yourself up? If the child is 28 but needs help with buying property now the trust won’t be able to help for the next two years. You might as well make these financial decisions and help your child when it is right and timely to do so.”

You need to be aware that a gift to a discretionary trust creates a chargeable lifetime transfer at a rate of 20%. However, this will only arise if the gift into the trust exceeds the individual donor’s available nil rate band currently £325,000.

Loan trusts

A loan trust and discounted gift trust mainly come in the form of a discretionary trust. “With a loan trust you lend the trust money, say £100,000,” Tony explains. “It is operated and controlled just like a discretionary trust but, unlike a discretionary fund, you can get the original amount of money back. However, you are not entitled to access any growth which has come from investing that £100,000.”

Tony explains that the main advantage of a loan trust is that it provides more flexibility for people who may not necessarily be able to afford to gift assets away.

Discounted gift trusts

“With a discounted gift trust you have to capitalise the value of the income stream to work out the overall loss to your estate,” Tony says. “It allows you to make a substantial gift, retain an income but also have a discount on the amount of money you appear to be giving away*. The main problem with this trust is that your income is fixed at the outset and you can never change it. Although you can turn the income off.”

Entrepreneurs can also use their business to create financially beneficial trusts. Your business qualifies for Business Relief and is not subject to IHT but as soon as the enterprise is sold it is no longer exempt.

“If someone is approaching the sale of their business they could transfer some of the shares into a discretionary trust. They are transferring an exempt asset, so they could put £1m into the trust rather than the £325,000 limit,” Tony says. “It is a major advantage for entrepreneurs.”

To determine which form of trust is best suited, Tony recommends seeking professional advice. “It depends on what people are looking for, their total value of wealth and how much flexibility they require,” he says.

“I’d advise people not to make any quick decisions and to involve all of their children in the process because the worst part of my job is getting involved in family disputes over money. Brits hate talking about money with their children, but they need to know what the trust means for them from the outset. It will certainly cut down on family arguments.”


The value of an investment with St. James’s Place will be directly linked to the performance of the funds you select and the value can therefore go down as well as up. You may get back less than you invested.

The levels and bases of taxation, and reliefs from taxation, can change at any time. The value of any tax relief depends on individual circumstances.

Trusts are not regulated by the Financial Conduct Authority.

*Exact amount of discount will only be calculated if death occurs within 7 years.

Putting your exit proceeds into a trust for your children can help protect your money and your family

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