Discretionary Trust

 Beneficiaries

Advantage Can benefit any named person, e.g. a spouse (after death of settlor), a particular relation or category of persons, e.g. your children, your grandchildren, nephews, nieces, in-laws .

Disadvantage You have to have trustees whom you can trust to exercise their discretion appropriately, though they will be limited to the list of beneficiaries you have specified.

Advantage Distribution of income and capital can reflect changing circumstances of the beneficiaries, e.g. disability, serious illness, or some becoming much better off than others. Trustees, particularly a professional trustee, can be relied on to follow any informal "expression of wish" letter which you might leave.

Length of trust

Advantage There is no definite time limit, but 75 years would seem appropriate. The trustees can give everything away and close the trust long before then if they choose.

Capital Gains Tax

Disadvantage Trusts are entitled to only half of the annual exemption which individuals enjoy: for 2007-2008 £4600, and on a distribution of capital there may be a problem if investments have significantly increased in value.

Disadvantage PEPs and ISAs cannot be put into the trust, so the securities and deposits in them would have to be removed from them first, thereby losing the tax advantages. However, no chargeable gain then arises at the time of transfer of such securities.

Disadvantage Unlike income tax, there is no scope for beneficiaries to recover Capital Gains Tax charged to the trust.

Advantage Capital Gains Tax can be "held-over" on assets put into a trust, so that none is payable by the donor at time of transfer. The trustees acquire the assets at cost plus indexation up to 1 st April 1998, cost of disposal, cost of improvements (to property) etc. Taper relief prior to the transfer is lost.

Advantage Where capital is distributed, the gain can be held over to the beneficiary.

Disadvantage If the beneficiary becomes non-UK tax resident, the gain immediately crystallises, and the beneficiary, whom failing the trustees , is immediately liable to tax on the gain. This tax, unlike income tax, can never be recovered.

Income Tax on the trust

Disadvantage The trust pays 40% income tax.

Advantage Any beneficiary who is a UK citizen can reclaim this tax to the extent that their own tax position allows. Children are often best placed to do this.

Inheritance tax (IHT)

Disadvantage If your gifts into it within any cumulation period of 7 years exceed the nil-rate band, 20% lifetime gift Inheritance Tax is payable immediately.

Advantage If you live 7 years after your gift, the slate is wiped clean (as with direct gifts).

Disadvantage Tax of up to 6% once every 10 years, depending on circumstances, and a proportion of this when capital is taken out during any ten year period - not likely ot be significant.

Advantage The trust can lend money to a beneficiary, including your spouse, so avoiding increasing his or her estate

Advantage No inheritance tax on death of potential beneficiary

Advantage You can give your annual exemption of £3000 and make gifts out of normal income into a trust without Inheritance Tax implications

Disadvantage You must not benefit from your own trust in any way.

Expenses

 Disadvantage Bennetts' typical fees and outlays for advising on and setting up a lifetime nil-rate band trust are in the region of £875. Nil-rate band trusts in Wills are not subject to an extra charge.

Disadvantage Annual running costs (accountancy, stock market valuation fees) will be about 0.75% on a trust with assets equivalent to the nil-rate band. Bennetts share any stockbrokers commission.