How to grow disposable income (and capital) to £10,000 per year within a trust?
17 October 2022
Question by Mary
I’m investing a sum in excess of £200,000 with fellow trustees from a trust for my brother who has health issues. We’d like to have disposable income (or we’ll need to spend capital) to support his various needs of £10,000 per year. And if we could also find a way to grow the capital we’d appreciate that.
Thank you 🙏
Thank you for your question, I have provided some information for you below.
Whilst I am sure you are aware, as a trustee you have a number of duties that must be strictly complied with. The key duties that I want to highlight when considering investing are:
It is a fundamental duty of trustees to invest the trust fund so that the beneficiaries’ interests (whether in terms of income or capital appreciation) are enhanced.
The duty of the trustees in relation to investment is to use their powers in the best interests of current and future beneficiaries.
Trustees should also consider whether they are under any duty to sell any part of the trust property.
For the purposes of 'investing' in this message we are discussing the use of stocks and shares, however there are other options available. It is important that, if you do not feel confident investing the assets within the trust, including making ongoing investment management decisions, you seek professional advice. Otherwise, you could be in breach of your duties.
The first step is to fully understand the wording of the trust deed, and whether any of the terms restrict or dictate the type of assets which should be utilised.
The next decision that will need to be made is the type of structure you hold within the trust. There are two structures that are commonly considered, each with different benefits and restrictions, summarised below:
Investment Bond - You could look to invest within a bond structure. Bonds are not deemed to generate income, so tax reporting can be simplified. There is the facility to draw 5% cumulative withdrawals without triggering an income tax liability (up to 100% of the initial value). No income tax liability occurs until a chargeable event within the bond is triggered. However, as the bond is not an income-producing asset the wording of the trust deed would need to be carefully considered, as would the timeframe of the trust and the need for income as bonds provide limited flexibility without income tax implications.
General Investment Account - You could invest in an unwrapped investment account. This does not have any tax advantages and a tax return would be required to report any income or capital gain which is incurred. However, the account provides income flexibility, and you could look to invest in an income producing portfolio, or one which targets capital growth, depending on the trusts objectives.
The final decision is the asset allocation of the trust investment. This should be assessed based on three key considerations:
Attitude to risk - This is an assessment of how comfortable you, in your capacity as trustees, are seeing the investment go up and down in value.
Capacity for loss - This is an assessment of how much risk the trust can afford to take. This will come down to timeframe and objectives for the money.
Risk required - This is an assessment of how much risk the trust needs to take with the money to achieve its objectives. Based on the figures about the portfolio will need to provide an income of around 5% per annum.
Once you have determined the trusts overall risk appetite, you can then establish a suitable asset allocation for the investment portfolio. Risk is managed by diversification, and it is important you understand how different assets can impact the risk the trust money is exposed to, and the spread of assets which would be suitable to achieve the agreed attitude to risk. It is then crucial that you monitor and realign the investments on a regular basis (i.e. annually) and that you monitor and make changes to any funds which are no longer suitable (i.e. because of performance or changes to management or strategy).
I would strongly suggest that you meet with a financial adviser to discuss the options available in more detail.
I hope this helps but if you have any further questions please do not hesitate to reach out,
All the best,