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As a British citizen living or working abroad, understanding the nuances of trust law and its implications on your financial planning is crucial. Two common types of trusts that often come into consideration are Discretionary Trusts and Bare Trusts.

Each has distinct features, benefits, and implications, particularly for expatriates who must navigate the complexities of cross-border taxation and estate planning.

What is a Trust?

A trust is a legal arrangement where one or more 'trustees' are made responsible for assets, which they hold for the benefit of one or more 'beneficiaries'. The terms of the trust dictate how and when the beneficiaries receive the benefits.

Discretionary Trusts

Discretionary Trusts offer a high degree of flexibility, which is particularly advantageous for expatriates whose circumstances may change due to their international lifestyle.

Key Features

Flexibility: Trustees have the discretion to decide which beneficiaries (from a specified group) receive the trust assets and when they receive them.

Control: Settlors can guide trustees through a 'Letter of Wishes', although this is not legally binding.

Tax Planning: Can be efficient for inheritance tax planning, as assets placed in the trust are usually treated as being outside the settlor's estate after seven years.

Considerations for Expatriates

Tax Implications: Depending on the jurisdiction, the income and gains within the trust may be subject to different tax rules.

Estate Planning: Offers a way to manage assets across different countries, potentially simplifying the estate upon death.

Regulatory Environment: The trust's treatment will depend on the laws of the country where the expatriate resides, as well as UK laws.

Discretionary Trusts and Tax Savings

Inheritance Tax (IHT) Efficiency: Placing assets into a Discretionary Trust can potentially reduce IHT liability. Once assets are in a trust, they are typically considered outside of the settlor's estate after seven years, subject to potential exit charges and ten-year anniversary charges.

Income and Capital Gains Tax: The income and gains within a Discretionary Trust may be subject to higher rates of tax within the trust. However, distributions to beneficiaries might be taxed at potentially lower rates, depending on the beneficiary's personal tax status.

International Considerations: For expatriates, the interaction between UK tax laws and those of the country of residence is crucial. Discretionary Trusts can offer a way to manage assets in different jurisdictions, possibly reducing overall tax exposure.

Bare Trusts

Bare Trusts, in contrast, are much simpler. They are often used for holding assets for a beneficiary who is not yet of age.

Key Features

Simplicity: The beneficiary has an immediate and absolute right to both the capital and income of the trust.

No Discretion: The trustees do not have discretion over the assets. The assets are held in the name of the trustees but for the sole benefit of the specified beneficiary.

Transparency: Tax authorities often view these as transparent for tax purposes.

Considerations for Expatriates

Tax Efficiency: Income and gains are usually treated as the beneficiary's for tax purposes, which could be advantageous depending on their tax status.

Less Control: Once the beneficiary is of age, they have complete control over the assets.

Estate Inclusion: Assets in a Bare Trust are typically considered part of the settlor's estate for inheritance tax purposes.

Bare Trusts and Tax Savings

• Transparency for Tax Purposes: Bare Trusts are often transparent for tax purposes, meaning income and gains are usually taxed as if they belong directly to the beneficiary. This can be advantageous if the beneficiary is in a lower tax bracket.

• Simplicity and Compliance: The straightforward nature of Bare Trusts can simplify tax reporting and compliance, particularly in international contexts.

• No IHT Efficiency: Unlike Discretionary Trusts, assets in a Bare Trust are usually considered part of the settlor's estate for IHT purposes. However, they offer a straightforward transfer of assets to the beneficiary, which could be beneficial in certain circumstances.

Choosing Between Discretionary and Bare Trusts

When deciding between a Discretionary Trust and a Bare Trust, British expatriates must consider their personal circumstances, long-term goals, and the tax implications in their country of residence. Discretionary Trusts offer more control and flexibility, which can be beneficial in a changing international landscape, whereas Bare Trusts offer simplicity and transparency.

General Tax Considerations

• Double Taxation Agreements (DTAs): Understanding DTAs between the UK and the country of residence is essential. These agreements can prevent double taxation on the same income.

• Reporting Requirements: Both UK and foreign tax reporting requirements must be considered. For instance, UK resident trusts may have to report to HM Revenue and Customs, even if the settlor and beneficiaries are not UK residents.

• Changing Tax Laws: Tax laws can change, both in the UK and abroad. It's vital for expatriates to stay informed and adapt their trust arrangements accordingly.

Need help & guidance?

ProACT Partnership have been helping expatriates all across the world for over 20 years. We are trusted by our clients all over the world to deliver on a broad range of expatriate services from tax, wills, trusts, immigration, business services & much more.

If you would like to discuss your situation with us and see how we can help your journey living & working abroad we offer a free impartial online review with zero obligations. Book a free review now or alternatively contact us.