Taxation of Trusts | Brand Financial Training

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The Taxation of Trusts Can Be Tricky

April 28, 2020

The Taxation of Trusts Can Be Tricky

Posted by The Team at Brand Financial Training on April 28, 2020 in AF1, AF5, J02, R03, R06, Taxation
Last updated on May 5th, 2020 at 10:06 am

Trusts are a valuable financial planning tool, yet the taxation of them can cause problems for students taking the CII exams. Here, we look at the income tax position of the three main types of trust that can be examined in AF1, J02, R03 and potentially in R06 and AF5 as well.

THIS ARTICLE IS RELEVANT TO EXAMINABLE TAX YEAR 2019/20.

In future articles, we will consider the capital gains tax and inheritance tax treatment.

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Bare Trust Trustees act as nominees Beneficiary is absolutely entitled to the assets – or would be if they were aged 18	Interest in Possession Where one or more beneficiaries has the right to the income arising in the trust	Discretionary Trusts The trustees have discretion as to who gets income and capital
	Income belongs to the beneficiary Taxable at beneficiary’s rates Unless money from parent in which case taxed on the parent if over £100pa and beneficiary unmarried minor Beneficiary liable for tax, not trustees Beneficiary must include on tax return	Trustees have no personal allowance/or PSA/DA Trustees liable for basic rate tax only Savings & other income = 20% Dividends = 7.5% Not entitled to tax relief on expenses/are deducted prior to distribution Expenses set against income in order: UK dividends, foreign dividends, savings, other income If settlor interested taxed on settlor (can reclaim from trustees) Beneficiary: Trustees complete R185 – shows net of tax figures Beneficiary adds trust income to own income Entitled to tax credit for tax deducted from trust income Beneficiary may reclaim/pay extra at own rates Sometimes trust income is paid directly to beneficiary instead of going through trustees’ hands – HMRC then assesses individual Beneficiary can use their PSA and/or DA	Trustees have no personal allowance/no PSA or DA Trustees have standard rate band (£1,000 2019/20) Taxed at 7.5% (dividends) or 20% (all other income) Divided by the number of trusts created by settlor Minimum £200 per trust Thereafter trustees taxed at 38.1% (dividend) or 45% (all other income) Distributions subject to a 45% tax credit If income accumulated, then no tax liability for beneficiary Trustee’s expenses are allowable in working out income chargeable, but income relieved remains charged at 7.5% or 20% – expenses are grossed up Expenses set against dividend income, then savings income and finally other income Beneficiary: Distributions to beneficiaries deemed to be trust income and carry 45% tax credit Non-taxpayers reclaim 45% Basic rate taxpayers reclaim 25% Higher rate taxpayers reclaim 5% Additional rate taxpayers – no reclaim Beneficiary cannot use PSA or DA as ‘trust income’

Bare Trust
Trustees act as nominees Beneficiary is absolutely entitled to the assets – or would be if they were aged 18

Interest in Possession
Where one or more beneficiaries has the right to the income arising in the trust

Discretionary Trusts
The trustees have discretion as to who gets income and capital

Income belongs to the beneficiary

Taxable at beneficiary’s rates

Unless money from parent in which case taxed on the parent if over £100pa and beneficiary unmarried minor

Beneficiary liable for tax, not trustees

Beneficiary must include on tax return

Trustees have no personal allowance/or PSA/DA

Trustees liable for basic rate tax only

Savings & other income = 20%

Dividends = 7.5%

Not entitled to tax relief on expenses/are deducted prior to distribution

Expenses set against income in order: UK dividends, foreign dividends, savings, other income

If settlor interested taxed on settlor (can reclaim from trustees)

Beneficiary:

Trustees complete R185 – shows net of tax figures

Beneficiary adds trust income to own income

Entitled to tax credit for tax deducted from trust income

Beneficiary may reclaim/pay extra at own rates

Sometimes trust income is paid directly to beneficiary instead of going through trustees’ hands – HMRC then assesses individual

Beneficiary can use their PSA and/or DA

Trustees have no personal allowance/no PSA or DA

Trustees have standard rate band (£1,000 2019/20)

Taxed at 7.5% (dividends) or 20% (all other income)

Divided by the number of trusts created by settlor

Minimum £200 per trust

Thereafter trustees taxed at 38.1% (dividend) or 45% (all other income)

Distributions subject to a 45% tax credit

If income accumulated, then no tax liability for beneficiary

Trustee’s expenses are allowable in working out income chargeable, but income relieved remains charged at 7.5% or 20% – expenses are grossed up

Expenses set against dividend income, then savings income and finally other income

Beneficiary:

Distributions to beneficiaries deemed to be trust income and carry 45% tax credit

Non-taxpayers reclaim 45%

Basic rate taxpayers reclaim 25%

Higher rate taxpayers reclaim 5%

Additional rate taxpayers – no reclaim

Beneficiary cannot use PSA or DA as ‘trust income’

This is part 1 of a 2-part series. Here, we talk about the CGT and IHT treatment of trusts.

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