How to set up and maintain a trust

Setting up and maintaining a trust requires careful planning to ensure it operates effectively and remains compliant with UK law. From selecting the right type of trust and drafting the trust deed to registering with HMRC and fulfilling ongoing trustee duties, each step plays a crucial role in safeguarding assets and meeting legal obligations.

Setting up your trust - the planning phase

• Clearly define why the trust is needed and your objectives - is it for asset protection, tax planning, estate planning, a disabled relative or other purpose? Consider the financial needs of beneficiaries and their long-term interests. Think about the length of the trust – should it be short-term or intergenerational?

• Choose the type of trust - are assets held for a single beneficiary with absolute entitlement or perhaps an accumulation trust targeting income growth and preservation for children some way down the line? Do you want any beneficiaries to have a right to income, commonly used for property and long-term family wealth planning? Another option is a discretionary trust giving trustees control over distributions.

• Do you want to retain some benefits from the trust? - this is called a settlor interested trust but tax implications can be significant; professional advice is essential.

• Choose and consult with trustees - an absolutely critical part of setting up a trust is deciding who will be the trustees. You will need a minimum of two trustees (or a trust corporation) to ensure continuity and a key choice, overlapping with your objectives is whether to choose individuals with financial and legal expertise; professional trustees can be costly but add experience and specialist skills.

Stage 2 of setting up a trust - the trust deed

• Clearly define the settlor, trustees, beneficiaries, and trust assets.

• Outline powers and responsibilities of trustees, including flexibility for future changes.

• Include provisions for dispute resolution, amendments, and termination of the trust.

• Seek legal assistance to ensure compliance with UK trust laws and prevent future complications.

• Be aware of hidden pitfalls such as unclear beneficiary definitions or restrictive clauses that may cause issues later.

Transfer assets into the trust

• Register assets in the name of the trustees to formalise ownership.

• Inform financial institutions and property registries to prevent administrative hurdles.

• Ensure compliance with tax and regulatory requirements to avoid unexpected costs.

• Consider potential stamp duty and capital gains tax liabilities when transferring assets.

Legal and tax aspects to set up a trust

• Register with HMRC via the Trust Registration Service (TRS).

• File annual trust tax returns where applicable to avoid penalties.

• Regularly update HMRC records to reflect any changes in trustees or beneficiaries.

• Income Tax – varies based on trust type; trustees may need to file tax returns and pay at higher tax rates.

• Capital Gains Tax (CGT) – trustees may be liable for CGT on trust assets, often at a higher rate than individuals.

• Inheritance Tax (IHT) – Trusts may be subject to periodic (every 10 years) and exit charges (when assets leave the trust).

• Stamp Duty Land Tax (SDLT) – Applies to property transfers into trusts; plan ahead to minimise costs.

Ongoing maintenance of the trust

Trustees must comply with legal duties to :-

• Act in accordance with the trust deed and UK law to prevent legal challenges.

• Keep accurate records of income, expenses, and distributions to ensure transparency.

• Annual compliance requirements - file tax returns and reports with HMRC to remain compliant, provide annual accounts to beneficiaries where required to maintain trust transparency and update the Trust Registration Service (TRS) for changes in trustees or beneficiaries to avoid penalties.

• Maintain regular communication with beneficiaries to manage expectations and avoid disputes.

• Review the trust’s suitability periodically in light of changes in tax laws and family circumstances.

• Review investments regularly and ensure prudent management to safeguard assets. Seek professional financial and legal advice where necessary, as poor investment decisions can erode trust value. Assess the flexibility of asset allocations to adapt to future economic conditions or beneficiary needs.

Contact our specialist trust solicitors for detailed advice on setting up a trust and/or dealing with ongoing compliance or other legal issues. Professional guidance ensures compliance and effectiveness.