For many, trusts are the legal equivalent to marmite – you either love 'em or hate 'em! But need it be that way? Acquiring a taste for them is surely a third option as the benefits they offer may, like marmite, be good for you.

By benefits, I mean not only the advantages they bring to your clients, but being comfortable with the concept of trusts can open endless opportunities for your business.

How can this be achieved?

A basic knowledge of trusts can give you the confidence to approach professional connections. Trust legislation now generally requires trustee clients to obtain and consider 'proper' investment advice, and that is where you can help by providing investment expertise.

When speaking with solicitors and accountants, it is important to understand the way they are likely to classify trusts. You will have no doubt encountered many different names for describing trusts – will trusts, spousal bypass trusts, accumulation and maintenance trusts, bereaved minors trusts, carve outs, flexible trusts, family trusts, inter vivos trusts – the list goes on. This hotchpotch of names derives from a variety of legislative, marketing and tax origins, but perhaps the tax classification of a trust is most pertinent.

A trust can broadly be classified into one of three main categories; bare trusts, interest in possession trusts and discretionary trusts. Each of the trusts mentioned above will fall into one of these categories, and this will help to determine the tax treatment of the trust and the parties to it. The category may also be a clue as to the motivation behind the trust's creation.

• Bare trust. This is one of the simplest types of trust to understand. The named beneficiary (ies) has an 'absolute' interest in the trust assets. This cannot be altered by the trustees. They will be entitled to the assets from the age of 18 (16 in Scotland), and even if they should die earlier than this age, the trust value will be included in their estate for inheritance tax and the ultimate destination of the assets will be determined by the intestacy rules (or their Will if they have made one). Gifts into the trust will be potential exempt transfers (PETs) by the settlor, and the trust itself will not be subject to the 'relevant property' regime i.e. will not be subject to the 10 yearly periodic charges, or exit charges on any distributions between these dates. For income tax, inheritance tax and capital gains tax, the trust is transparent and the beneficiary will generally be the person assessed.
• Interest in possession (IIP). At least one beneficiary has an immediate right to income, although it may be possible for the trustees to change the person with this right. The trustees may also have the power to decide who receives the trust capital, but this does not make it a 'discretionary' trust. A life interest trust (liferent trust in Scotland), where a named beneficiary has a right to income for their lifetime, is a type of IIP. In this case the trustees would not normally be able to take this right away, and another beneficiary would be entitled to capital on the death of the person entitled to income. The Finance Act 2006 changed the way in which these types of trust are treated for inheritance tax purposes. Transfers into the trust are normally chargeable transfers by the settlor (previously they would have been PETs, which treatment may still apply to certain trusts for disabled beneficiaries). To establish whether these trusts are subject to the relevant property regime, you need to determine whether the IIP is a 'qualifying IIP' or not. Broadly, those trusts with a qualifying IIP are likely to be pre 22 March 2006 IIP trusts, certain disabled trusts and certain trusts created on the death of an individual since 22 March 2006. Those trusts with a qualifying IIP will not be subject to the relevant property regime, otherwise the trust will potentially be subject to periodic and exit charges. With regards to income tax, it is the overall income of the beneficiary with the right to income that will determine the amount of tax payable by the trustees and whether additional tax is payable by the beneficiary, irrespective of whether the IIP is qualifying or not. Any capital gains tax will be payable by the trustees.
• Discretionary. No beneficiary has a right to income, allowing trustees the power to decide which beneficiaries get income and/or capital and when. Alternatively, they may accumulate income if they feel that this is in the interests of the beneficiaries, although the period over which they can accumulate may be limited. This type of trust offers the maximum flexibility, but possibly at a higher tax and administration cost. For inheritance tax, transfers into the trust will be chargeable transfers which means that inheritance tax may be immediately payable by the settlor, and the trust itself will be subject to the relevant property regime of periodic and exit charges. Income will normally be taxed at the 'trust rate' with any income tax being payable by the trustees, and the trustees will also be liable for any capital gains tax arising on disposals.

Obviously, the above is only a high level summary of trust types and their tax treatment, which may change in certain situations. For example, where the beneficiaries of the trust include the spouse and/or minor children of the settlor of the trust, the settlor is liable for all income tax due on income received by the trustees. There may also be trusts which start out as discretionary but which give beneficiaries a right to income and/ or capital at a specific age, resulting in a change in the way income and gains are taxed.

When advising on investments for trustees, knowing how the trust is taxed, and who is entitled to income and capital is only part of the story. It is also important to understand the motivation and purpose behind the trust. Likely questions are:

• What are the trustees' investment objectives?
• Is the emphasis to be placed on income or capital growth?
• What are the capital and income requirements of the beneficiaries?
• Is there a need for diversification and how often should investments be reviewed?
• What risk profile do the trustees wish to adopt?

The trustees may have completed an Investment Policy Statement (IPS) which should provide you with the answers to some or all of these questions. It is actually a legal requirement under English and Northern Irish law and good practice under Scots law for trustees who delegate investments to be managed on a discretionary basis to complete an IPS.

The trustee investment market needs your investment expertise, and the rewards are there for those who accept the challenge. If this has whetted your appetite to get involved with this market, then further technical support is available from Standard Life's Techzone at www.adviserzone.com.

This communication is intended for qualified financial advisers only and must not be relied upon by anyone else.

Tax and legislation are likely to change. The information provided here is based on our understanding of law and HM Revenue & Customs practice at date of publication. No guarantees are given regarding the effectiveness of any arrangements entered into on the basis of this information.

Standard Life Assurance Limited (SC286833) is registered in Scotland at Standard Life House, 30 Lothian Road, Edinburgh EH1 2DH and is authorised and regulated by the Financial Services Authority. 0131 225 2552. Calls may be recorded/monitored.