13 May 2022

How to legally utilise a children’s trust to reduce business tax liability


Business owners may be able to reduce the tax liability of their business by using a trust that has been set up for the benefit of their children.

What is a trust?

A trust is a legal agreement between trustees and a settlor. The trustees hold assets that belonged to the settlor, and these assets are then used for the benefit of the beneficiaries. In the case of a children’s trust, the beneficiaries will usually be the child or children of the settlor.

The particular details of the trust are set out in a legal document called the Trust Deed. This names the settlor and trustees and the terms of the trust. A settlor can establish a trust while they are alive, or it may be created upon their death as set out in their will. There are two types of trust that are commonly used, a bare trust and a discretionary trust. A bare trust is the simplest kind of trust

The trustees of a trust will usually be liable for tax, which means that the trust will also be liable for Income Tax and Capital Gains Tax. Any income and capital gains that the trust has accrued will need to be declared through a self-assessment tax return.

Why set up a trust?

A trust can provide financial protection for people important to you in a flexible way. It has a range of tax benefits and can be used to reduce your tax liability while ensuring provision for your children.

Can you use a trust set up for your children to reduce your limited company taxes?

The taxation rules around trusts are complex and can be confusing. A trust can be a vehicle for different assets, including company shares. You can place shares for your limited company into a trust on behalf of your children. While passing shares to your children would normally incur Capital Gains Tax, ‘holdover’ reliefs are available. These defer the CGT until the asset is disposed of by the beneficiary, who will then become liable for the tax at a later date.

The range of reliefs and possible tax reductions that a trust can deliver will depend on the type of trust that you set up, the assets that are held in it and who they are held for.

If you’re looking for a tax-efficient means by which to provide for your children, then it’s important to receive professional advice.

Telephone 01224 930641 / 07446 844226 or email info@a2zaccounting.co.uk to find out more about some of the benefits of setting up a trust for your children and how it may be able to reduce your business tax liabilities.

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