Use the Lexology Navigator tool to compare the answers in this article with those from other jurisdictions. 

Trusts, foundations and charities

Trusts

Are trusts legally recognised in your jurisdiction? If so, what types are available and most commonly used?

Trusts are recognised and the laws governing the creation, operation and taxation of trusts are well established.

The main types of trust are:

  • bare trusts (or nominee arrangements) – where assets are held by the trustee for the beneficiary absolutely;
  • discretionary trusts – under which trustees hold assets for the benefit of a group of individuals and have discretion over who benefits and in what proportions; and
  • life interest trusts – under which at least one individual is entitled to the income from the trust assets during his or her lifetime, but when and how the capital is distributed is generally at the discretion of the trustees.

Other types of trust include:

  • disabled persons’ trusts – trusts for disabled individuals that benefit from preferential tax treatment;
  • bereaved minors’ and bereaved young persons’ trusts – trusts established by deceased parents for their children, again benefitting from preferential tax treatment; and
  • charitable trusts.

Trusts can be established during an individual’s lifetime or by will. Discretionary and life interest trusts are commonly created by wills. Discretionary trusts give flexibility to administer a deceased’s estate in light of the circumstances at the time of death. Life interest trusts are useful where a testator wishes to make lifetime provision for an individual (eg, a spouse or other partner), but ultimately wishes for capital assets to pass to other individuals (eg, children).

Non-charitable purpose trusts generally cannot be established.

What rules and procedures govern the establishment and maintenance of trusts?

To establish a valid trust under the law of England and Wales the following certainties are required:

  • Intention – the settlor must make a clear, unambiguous declaration that he or she intends to create a trust.
  • Subject matter – the property to be held on trust must be sufficiently certain and capable of identification.
  • Objects – the beneficiaries of the trust (typically identified by name or by reference to a class) must be sufficiently certain (Knight v Knight ((1840) 49 ER 58)).

The settlor must also be legally capable and have the legal power to transfer the assets concerned to the trustees.

Under the law of England and Wales, trusts cannot be established for an unlimited period; there is a fixed perpetuity period of 125 years for all trusts – including will trusts – created on or after April 6 2010 (Perpetuities and Accumulations Act 2009).

Trusts can be established by oral declaration. A trust need not be in writing unless it relates to land or any interest in land.  

The rules governing the maintenance and operation of trusts are primarily contained in statute. The Trustee Act 1925:

  • enables trustees to advance income to minor beneficiaries and beneficiaries with contingent interests (or to accumulate income);
  • enables trustees to advance capital to beneficiaries who are contingently entitled to trust assets; and
  • provides for the retirement, removal and appointment of trustees.

Other key statutes governing the maintenance and operation of trusts are the Trusts of Land and Appointment of Trustees Act 1996 and the Trustee Act 2000, which deals with the trustee’s power to invest the trust property.

The rules governing the creation and administration of trusts in Scotland are different.

How are trusts taxed in your jurisdiction?

Bare trusts are transparent for tax purposes (ie, beneficiaries are treated as owning the assets held for them by the trustee or nominee absolutely).

The tax treatment of other trusts depends on the type of trust and whether it is UK resident.

UK resident trusts Capital gains The trustees of a UK trust are subject to capital gains tax on any chargeable gain realised on the disposal of any trust asset. Trustees are entitled to an annual allowance of £5,650 (ie, half the annual allowance for individuals). Reliefs may apply on the disposal of certain assets (eg, residential property that has been a beneficiary’s only or main residence, and assets used in a business carried on by the trustees).

Income The trustees of a UK trust are subject to income tax on all income of the trust. For a life interest trust, the trustees’ liability to income tax is limited to basic rate tax (20% for non-dividend income). Life tenants may have to pay additional tax, depending on their other personal income in the tax year. For discretionary trusts, the trustees pay income tax at the trust rate (45% on non-dividend income over an exemption of £1,000). The settlor of the trust may also be subject to income tax on income arising to the trust, depending on his or her residence and domicile status. Beneficiaries in receipt of benefits from the trust may also be subject to income tax to the extent that there is income in the trust, but may receive credit for trust paid by the trustees.

Non-UK resident trusts 

Capital gains The trustees of a non-UK trust are subject to capital gains tax on UK residential property and assets used as part of a trade carried on in the United Kingdom only. The settlor of the trust may be subject to capital gains tax on the gains of the trust as they arise, depending on his or her residence and domicile status. To the extent that trust gains are not taxed on the settlor, they may be taxed on beneficiaries who receive benefits from the trust.

Income The trustees of a non-UK trust are subject to income tax on UK source income only. The settlor of the trust may be subject to income tax on income arising to the trust, depending on his or her residence and domicile status. Beneficiaries in receipt of benefits from the trust may also be subject to income tax to the extent that there is income in the trust.

Inheritance tax Most trusts are subject to:

  • a charge to inheritance tax on each 10-year anniversary of the creation of the trust (at a maximum rate of 6%); and
  • exit charges when assets leave the trust (charged at a proportion of 6%, depending on the period that has elapsed since the last 10-year anniversary.

Subject to certain exceptions, non-UK assets of a trust established by a non-UK domiciled and not deemed domiciled individual are not subject to inheritance tax.

Foundations and charities

Are foundations and charities legally recognised in your jurisdiction? If so, what forms can they take?

Under the law of England and Wales, charities can be established in a number of legal forms, most commonly:

  • companies (limited by guarantee rather than shares);
  • trusts;
  • charitable incorporated organisations (specific corporate vehicles designed for charities); and
  • unincorporated associations (usually used for simple charities that have no significant activities or liabilities).

English law does not provide for the establishment of foundations.

What rules and procedures govern the establishment and maintenance of foundations and charities?

The rules governing the establishment and maintenance of charities in England and Wales are principally contained in the Charities Act 2011.

To qualify as a ‘charity’, the organisation must be established for at least one of the charitable purposeslisted in the Charities Act 2011 and for the benefit of the public.

Permitted charitable purposes include:

  • the prevention or relief of poverty;
  • the advancement of education or health;
  • the promotion of religious or racial harmony or equality and diversity; and
  • the relief of those in need by reason of:
    • youth;
    • age;
    • ill-health;
    • disability;
    • financial hardship; or
    • other disadvantage.

To meet the public benefit test, there must be an identifiable benefit to the public or a sector of the public.

UK charities must be registered with the Charity Commission and Her Majesty’s Revenue and Customs.

All UK charities must:

  • keep accounting records;
  • make their accounts and the trustees’ annual report available to the public on request; and
  • provide information to the Charity Commission on an annual basis.

Charities established as companies must submit accounts and annual returns to Companies House annually.

Charities are subject to regulatory oversight by the Charity Commission.

The rules governing the creation and administration of Scottish charities are different.

How are foundations and charities taxed?

UK charities are generally exempt from tax.

Gifts made by an individual to a charity are exempt from inheritance tax. Individuals who gift an asset to a charity are not subject to capital gains tax, even if the asset has increased in value. They may also be able to claim income tax relief on the gift.

Higher rate and additional rate taxpayers can also claim tax relief on cash gifts to charities.

The law does not provide for the establishment of foundations. The UK tax position of foreign foundations depends on the articles or by-laws of the foundation – they can be taxed as bare trust or nominee arrangements, or in the same way as companies or  trusts.

Click here to view full article.