Trust accounts in the UK and their benefits

In the UK, a trust is a legal arrangement where one party, known as the trustees, hold and manage assets for the benefit of one or more beneficiaries. The trustees make sure that any assets are distributed according to the wishes of the person who sets up the trust, known as the settlor.

Whilst accounts are not mandatory, in this blog, we’ll explore the key advantages of preparing trust accounts each year and how they contribute to the effective management of a trust.

There are several different types of trusts available in the UK, each serving different purposes, but the two most common are:

• Discretionary trusts: The trustees decide how the income and assets are distributed among the beneficiaries.
• Interest in possession: The beneficiary has a right to the income generated by the trust assets, but not to the assets themselves.

The preparation of accounts offers many benefits for both the trustees and beneficiaries:

1. Regulatory compliance review

• Accounts help trustees comply with the UK's specific legal and regulatory requirements to make sure that proper accounting standards are met. They also provide accuracy should the trust be audited or reviewed.

2. Tax reporting

• Accounts facilitate accurate tax reporting, as well as inheritance tax event reporting (for both ten-year anniversaries and exit charges), and can assist in identifying any tax saving opportunities, helping minimise disputes and potential penalties.
• Accounts can aid the trustees with determining the appropriate split of certain expenses between income and capital. Some income expenses are classed as Trust Management Expenses (TMEs), which for a discretionary trust can reduce the trust’s overall tax liability, and for an interest in possession trust can reduce the income taxable on the beneficiary who has a right to the income.

3. Long-term planning assurance

• Accounts help the trustees make informed decisions which can prevent disputes and misunderstanding among the beneficiaries, helping with long term financial planning to provide for future generations.
• Accounts provide an overview of the trust’s financial position at the end of each tax year and are a useful document for trustees to use when making decisions on potential future appointments of capital or to monitor the financial performance of trust assets.

4. Transparency and accountability

• Accounts provide a clear record of the trust’s financial activities and asset management, ensuring that all transactions are documented, providing confidence in proper handling.
• They assist in making sure that the trust assets are represented correctly through the division between income and capital. This enables trustees to review and distribute income/capital to the relevant beneficiaries, as some beneficiaries may only be entitled to income whereas other beneficiaries may only be entitled to capital.

5. Identify amounts available for income distributions

• For discretionary trusts, accounts can help trustees make informed decisions about potential income distributions by separating income from capital. Detailed financial statements ensure compliance with the trust's terms and informed decisions about distributions and the tax pool.
• For interest in possession trusts, accounts determine whether there are any additional amounts which need to be paid to the beneficiaries who have a right to the income.

Overall, by maintaining accurate financial records, accounts can aid accurate tax reporting and future decision making by the trustees, minimise disputes and potential penalties and ultimately support the trust’s long-term goals.

If you have any questions about any of the information included, please get in touch with your usual contact at Larking Gowen, or email enquiry@larking-gowen.co.uk.

You can find contact details on the Our People section of the Larking Gowen website.

Lauren Domiczew