One of the well-known reasons why settlors set up a trust is to make use of the nil rate band which allows them to transfer assets up to the Inheritance Tax threshold of £325,000 tax free if they survived for seven years.
However, many believe that this is not the only reason why they set up a trust as they could have gifted the same amount tax-free to their beneficiaries.
Here are the main reasons why individuals set up trusts:
By setting up a trust, settlors can pass on their assets but continue to be in control of how their assets are managed and used for a set period of time. Without the trust, they lose control of their assets once they have been gifted to family or relatives.
They also use trusts to protect their assets from other people, including beneficiaries and other relatives. Moreover, it allows for flexibility wherein settlors can respond to changing circumstances and needs within their family.
Another benefit they get from setting up a trust is reducing their income tax liability. For example, they pass on income through the trust to basic rate taxpayers.
Based on this research, settlors did not set up trusts primarily for tax purposes but for personal reasons such as flexibility and control of their assets, and tax was only always a secondary factor.