Trust Tax Returns

Trust Tax Returns

The taxation of trusts can seem complicated, but by understanding the basics, you can make informed decisions about how to manage and distribute trust assets.

It’s wise to seek advice from an accountant or qualified tax professional to ensure that your trust is structured in the most tax-efficient way possible. If you're considering setting up a trust or need help with trust taxation, please reach out to us for guidance.

'We can guide you on how to Maximise Efficiency and Minimise Liabilities.'

UNDERSTANDING THE TAXATION OF UK TRUSTS:

Trusts can be a useful tool for managing assets and ensuring that wealth is passed on to the right people. But, if you're thinking about setting up a trust in the UK, it's important to understand the tax rules that apply to them.

We'll break down some of the basics of trust taxation in a way that’s easy to understand.

What is a Trust?

A trust is a legal arrangement where one person (the "settlor") gives assets, like money or property, to a trustee. The trustee then manages these assets on behalf of the beneficiaries, who are the people meant to benefit from the trust.

Different Types of Trusts

There are several types of trusts in the UK, but for tax purposes, we'll focus on the main ones:

Bare Trusts – The beneficiary has full control over the assets and can take them at any time. These trusts are seen as look-through.
Interest in Possession Trusts – The beneficiary has the right to receive income from the trust, but not necessarily the assets themselves.
Discretionary Trusts – The trustee has the power to decide who gets the income and/or assets, and how much they get.

Taxation of Trusts

Trusts are taxed differently depending on the type of trust and how the income is distributed. Below is a breakdown of the key taxes that may apply:

1. Income Tax
Trusts are taxed on any income they generate, such as interest or rental income. If the income is paid to the beneficiaries, they may also have to pay income tax. However, trustees often pay tax at a higher rate than individuals, so it’s important to consider how income is distributed.

For discretionary trusts, the trustee pays income tax at the higher rate (45%) if the income is not distributed. If the income is distributed to beneficiaries, the trustees can "gross up" the payment to cover the tax that would have been paid. The beneficiaries then pay income tax at their own marginal rates.

2. Capital Gains Tax (CGT)
When a trust sells non-cash assets (like property or investments) for more than they bought them for, it has to pay capital gains tax on the profit. However, there are some exemptions available for certain types of trusts. Trustees generally pay CGT at a rate of 20%, but for residential property, the rate is 28%.

3. Inheritance Tax (IHT)
One of the main concerns for trusts is inheritance tax. If a trust holds assets that are transferred into it, these assets may be subject to IHT if the settlor passes away.

For discretionary trusts: IHT is charged at a rate of 6% on the value of the assets transferred into the trust, at each 10 year anniversary from its creation, but there’s an allowance called the “nil-rate band” that can reduce the amount of tax due.
For other types of trusts: The assets in the trust could be taxed on the settlor's death or when the trust’s assets are passed on to beneficiaries.

4. Tax on Trust Distributions

If the trust distributes income or assets to the beneficiaries, they might need to pay tax on what they receive. This is often based on the type of trust and whether the distribution is considered income or capital. Trustees should ensure the appropriate amount of tax is deducted before making payments to beneficiaries.

FAQ's

This is a running total of the tax paid by the trustees less any tax credits that have been taken out of the pool by the beneficiaries.

HMRC use this method to ensure that any tax reclaimed by the beneficiaries of a discretionary trust, does not exceed the original amount of tax paid by the trustees.

A record of the tax pool must therefore be maintained by the trustees and sent to HMRC with along with a copy of the trust return.

If you have any question in relation to trusts or if you need help with your trust return then please request a free consultation.

These are genuine management expenses that can be deducted from the gross income of the trust.

They are set against dividend income in priority to other sources of income. If there is insufficient income to meet the management expenses then they are set again interest then non-savings income.

When deducting trust management expenses, these must first be grossed up at appropriate rate of tax, in the income tax computation.

The rates of tax depend on the type of trust that you are dealing with. IIP trusts pay tax at the basic and dividend ordinary rate of 20% on interest and rental income and 8.75% on dividends.

Trustees of an IIP are not entitled to a Personal Savings Allowance or Dividend Allowance and the trustees cannot claim a deduction for any trust management expenses.

Discretionary trusts pay tax at the “Rates Applicable to Trusts” on accumulated or discretionary income. This is charged at a flat rate of 45% for savings and non savings income and 39.35% for dividends.

Trustees are not entitled to a Personal Savings Allowance or Dividend Allowance but relief is available for some trust management expenses incurred.

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How Can We Help?

Tax planning can be complex, but there are ways to help reduce the amount of tax your trust might have to pay such as:

Distribute income to beneficiaries: In some cases, it may be more tax-efficient for income to be distributed to beneficiaries, as they might be taxed at lower rates.

Use allowances: Make sure to use any tax-free allowances, such as the nil-rate band for inheritance tax.

Consider the type of trust: Some types of trusts, like bare trusts, of Interest in Possession Trusts (IIP's) might be taxed more favorably than others.

At MW Tax, we can assist with a range of services to help manage your trust more efficiently, and keep up to date with your tax obligations including:

Dealing with all relevant trust registrations services..

Analysing and optimising the use of trust management expenses.

Preparing and submitting your trust return to HM Revenue and Customs and preparing forms R185.

Calculating and advising on subsequent tax liabilities or refunds due.

Calculating and advising on trust pools.

Advising on the tax treatment of income and capital distributions.

Where necessary, preparing and submitting self-assessment tax returns for the relevant beneficiaries and advising on any tax liabilities or repayments due.

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