CG33020 - Trusts: definition: trust
Trust
The word `TRUST’ describes a relationship between certain persons
- which is recognized by the law
- concerned with particular property, and
- enforceable by reference to rules of trust law.
There are five ingredients in this relationship in the normal case, described in TCGA as a ‘settlement’.
- A settlor
- Trustees
- Beneficiaries
- Settled Property
- Purposes
(Note that in England & Wales and Northern Ireland but not in Scotland the word ‘trust’ traditionally is used to describe particular obligations; several parts of TCGA refer to “property being held on trusts that secure…”.
Settlor
There must be a settlor also known as a truster in Scotland and, in the case of a trust set up by will, as a testator. The settlor provides the initial property and lays down in a deed or will the terms of the trust. In addition the settlor or someone else may add additional property
Trustees
There must be one or more trustees. They are the legal owners of the property. They are responsible to the beneficiaries for ensuring that the terms of the trust are complied with. They may have been given considerable discretion by the settlor to decide who should benefit in particular circumstances.
For example they may have Powers of Appointment under which property may be transferred to beneficiaries or new trusts may be declared.
Beneficiaries
There must generally be one or more beneficiaries. Their interests may be of many different kinds. They may be entitled to all of the income from the property, or a share of it, for their life or until they reach a particular age. Others may be entitled to the property, or a share of it, after the death of an income beneficiary, or when they reach a particular age.
There may be a number of beneficiaries who are merely entitled to share the income of the year in whatever shares the trustees determine (discretionary beneficiaries). If there are no present or future beneficiaries then the property goes back to the settlor. If there are no income beneficiaries and the trustees have no power to accumulate the income, it is payable to the settlor.
In certain cases specific beneficiaries are not required. In the case of a charitable trust it is unusual for there to be identified beneficiaries. In England & Wales the Charity Commissioners are responsible for ensuring that a charitable trust is properly operated. In Scotland this is the responsibility of HMRC. In Scotland, but not England, Wales or Northern Ireland, it is also possible for there to be trusts for the benefit of the public which are not charitable.
The settlor may be one of the trustees. In some cases he or she may be a beneficiary.
Settled Property
There must be settled property. There must be some property held in trust for the beneficiaries. Until the property has been formally transferred to the trustees the trust does not exist.
Purposes
There must be purposes. Scottish lawyers speak of a trust having purposes. This describes the basic aims of the trustees in holding the property. An English lawyer might speak of obligations or trusts. It is not enough for there to be beneficiaries without anyone knowing what benefits they are to take.
The trust deed or will may contain detailed provisions as to how the trustees are to act in investing property and providing benefits. If these are not provided then there are in some cases statutory rules and in other cases rules laid down by the courts. In general the deed or will can override any of these rules except those which fix the maximum life of a trust or those concerned with accumulating income.
Bare trust
A bare trust is a trust where the beneficiaries are `absolutely entitled as against the trustee.’ In this case for CGT purposes the trust is ignored and each beneficiary is treated as if owning the appropriate share of the underlying property.
CG34300+ explain how to identify a bare trust. The two types you are most likely to meet are:
a) Where there has been a conventional trust but the various purposes have been fulfilled and the beneficiaries can insist on the property being handed over, but the trustees for the time being still hold the property.
b) Where two or more persons are joint tenants or tenants in common of land. See CG70500+. One special case is that of English partnerships, see CG27000.
Occasionally you may meet pooling arrangements. See CG34320.
Unit trusts {#}
Unit trusts set up in the UK are as a matter of general law set up as trusts, with an institution such as a bank as trustee and beneficiaries who are called unit holders. For tax purposes however such unit trusts are treated as companies, and the units held by the unit holders are treated as if they were shares in a company. See CG41300+ for the treatment of the chargeable gains of the unit trust and CG57680+ for the treatment of the unit holders.
Investment funds
An investment trust is a non-close company which fulfils certain requirements, mainly concerned with how its funds are invested. If it meets these requirements, it is exempt from Corporation Tax on its chargeable gains. The taxation of investment trusts is dealt with in CG41400+.
Shareholders in investment trusts are taxed in the same way as shareholders in any other company.