Trusts and tax

Income and capital sharing

During a lifetime, a Trust offers a great opportunity for income and capital sharing.

• On the income side, a senior family member receiving £10,000 of dividend income, who is paying higher rate income tax at 33.75% each year, could route the same income through a Trust to a junior member of the family who has a full personal allowance, paying no tax. This generates a saving of more than £3,000.
• On the capital side, a Trust can appoint assets standing at a gain to a junior family member before it is sold, accessing their capital gains tax annual exemption. This could equal up to £3,000 of tax-free gains, and up to £37,700 of gains taxed at 18% instead of 24%, saving up to £2,982 compared to a higher-rate taxpayer.

Inheritance Tax planning

Traditionally, many unlisted trading companies qualified for 100% business relief, and IHT was not a major concern, as this relief reduces their IHT value to nil.

However, following the October 2024 budget, the chancellor confirmed plans to limit business relief to 100% on up to £1 million of assets, with anything above that level reduced by only 50%. Any trading company shares listed on AIM would also cease to benefit from 100% relief, irrespective of their value. These changes are expected to come into effect on 6 April 2026.
Trusts can have their own £1 million allowance, and companies with surplus cash, investments, or which are potentially going to be sold or liquidated, can be dragged into the IHT net at 40%.

Therefore, transferring shares into Trust not only banks the business relief at the time of transfer (with the £1 million limit applying from April 2026 across Trusts created by the same settlor), but also freezes the value of the shares at that time, which will be relevant if values are expected to increase.

• For example, a family member holding 20% of a trading company which may be sold over the next few years. The undiscounted value of their shares might be £1 million, but with a minority discount, these shares might be valued at £500,000. IHT is not an immediate issue as business relief applies (even up to the £1 million limit), but the shares are sold for cash, a 40% exposure on the full value arises immediately because the minority discount is lost, and the cash does not qualify for business relief.
• Instead, the shares might be transferred into a Trust before a sale. The transfer benefits from business relief (BPR) therefore avoiding any immediate lifetime IHT (depending on quantum and timing). It also freezes the value in the transferor’s estate at the discounted value. If a sale is delayed, the shares could remain in Trust continuing to benefit from business relief, though BPR will be capped from 6 April 2026.

Capital Gains tax planning

Trusts can also benefit from Business Asset Disposal Relief if there is a qualifying beneficiary with a life interest in the Trust. This can enable the Trustees to benefit from a reduced rate of capital gains tax of 14% on a qualifying disposal, with the rate increasing to 18% from 6 April 2026. These rates are below the main rate of capital gains tax, which is currently 24%.

Asset protection

OOnce the shares are in Trust they are more easily kept out of the reach of any perceived hot-headed beneficiaries, creditors, or a marital breakup. The Trustees, with discretion, can exercise complete control over who gets what. This could be a good incentive to keep family members on track.

Downsides

The main perceived downsides of Trusts are complexity, cost, and the potential for conflict if beneficiaries feel they are not being treated fairly.

In practice, and in the right circumstances, the tax savings can significantly outweigh the costs. Complexity can be kept to a minimum by setting up a structure that can be managed within the family without significant external involvement (e.g. by mandating income to beneficiaries and keeping Trustees within the family).

The fairness issue is ultimately a question for the Trustees, but with openness and the backing of a Family Charter or council, there is no reason why a Trust should be any more disadvantageous than a direct shareholding.

Next steps

Setting up a Trust does need professional advice, and there are potential tax charges to consider, many of which are negated in the family and owner managed business environment with the correct claims. Where they don’t work, families might consider a Family Investment Company (FIC) or partnership as an alternative. You can read more about Trusts tax implications and Family Investment Companies in our insights.

Please get in touch with Nick Latimer or your usual Crowe contact to discuss Trust planning further.