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TRUSTS

Can Trusts Mitigate The Tax I Pay?

Trusts have been instrumental in mitigating tax since Medieval times. Trusts were initially created for the Nobility and wealthy landowners to avoid paying taxes to the Crown.
 
The introduction of Trusts led to a distinct loss of tax revenue and it did not take long for the first anti-avoidance statute to be introduced; by Henry VIII in 1535.
 
Since then, there have been many changes to Trusts and their uses and equally to the Inland Revenue rules which affect them.
 
Nowadays, you don’t have to be a Nobleman, or a wealthy landowner to want to take advantage of the many tax strategies Trusts can provide.
 
Many people now look to using Trusts as a means of mitigating tax which would otherwise be payable.
 
There are four types of tax which could affect you and your estate:

  • Corporation Tax

  • Capital Gains Tax

  • Inheritance Tax

  • Income Tax

So whether you own your own business and your concern is Corporation Tax, own property or hold other forms of assets which would fall prey to Capital Gains Tax, or believe Inheritance Tax will become an issue for your intended beneficiaries; Countrywide Tax & Trust Corporation Limited can provide you with the correct type of tax planning to ensure as much tax as possible is saved.
 
Countrywide Estate Planning ifa are experts in providing advice on all aspects of tax planning and the use of Trusts, which will provide these ultimate tax savings.

The information given does not provide specific advice and may not be suitable to your individual circumstances.

Please not that the Financial Services Authority do not do not regulate some forms of Trust products & services. These services are provided by our sister companies Countrywide Legal Services Ltd & Countrywide Tax & Trust Corporation Ltd

 

WHAT IS A TRUST?

A trust is an obligation binding a person (which can be an individual or a company) called a 'trustee' to deal with 'property' in a particular way, for the benefit of one or more 'beneficiaries'.

In other words "the right money, in the right hands, at the right time."

What is a 'trustee'?

Trustees are the legal owners of the trust property. They are legally bound to look after the property of the trust in a particular way and for a particular purpose. Trustees administer the trust and in certain circumstances make decisions about how the property in the trust is to be used.

The trust can continue even though the trustees might change, but there must normally be at least one trustee.

What is 'property'?

The property of a trust can include:

  • money

  • investments

  • land or buildings

  • other assets, such as paintings

The cash and investments held in the trust are also called the 'capital' or 'fund' of the trust. This capital (or fund) may produce income, such as interest or dividends. The land and buildings may produce rental income. The way income is taxed depends on the type of trust.

What is a 'beneficiary'?

A beneficiary is anyone who benefits from the property held in the trust. There can be one or more beneficiaries, such as a whole family or a class of people, and each may benefit from the trust in a different way.

For example, a beneficiary may benefit from:

  • the income only, or

  • the capital only, or

  • both the income and capital of the trust

What is a 'Settlor'

A Settlor is a person who has put property into the trust. Property is normally put into the trust when it is created, but it can also be added at a later date.

How is a trust created?

Normally a trust is created by a deed. A Settlor might ask a professional adviser to draw up a trust deed, which then sets out the terms of the trust.

A trust can be created under the terms of a will, when someone leaves instructions that when he or she dies some or all of the estate is to be placed in trust. A trust can also occur if a person dies without leaving a will.

Sometimes the Courts will create a trust, for example; when deciding how to deal with property for the benefit of a child or an incapacitated person who cannot manage his or her own affairs.

I am a Settlor. What do I have to do when a trust is created?

Trust law and the taxation of trusts can be complicated. If you want to create a trust you should seek professional advice. An expert can then draw up the trust deed for you, and give advice on other legal matters relating to trusts.

What are my responsibilities as a trustee?

Your responsibilities depend on the type of trust and the terms under which the trust is created. The Settlor may have given instructions that trustees carry out various functions, and trust law may impose further obligations.

For taxation purposes you are responsible for:

  • notifying the Inland Revenue that tax is due, within six months of the end of the tax year for which it is due, where you have not received a tax return for the year

  • keeping records of the income and capital gains of the trust

  • completing and sending back any tax return issued to you

  • paying any tax due on the income or capital gains of the trust

  • supplying certificates or vouchers to the beneficiaries to show how much income they have received from the trust in the tax year and how much tax the trustees have deducted. (Inland Revenue Trusts can supply forms for you to use.)

Depending on the terms of the trust deed, you can appoint a professional adviser, such as a solicitor or accountant, to carry out some or all of these tasks. However, if you do, you are still responsible for ensuring that all tax obligations are carried out satisfactorily.

What happens when a trust ceases to exist?

If a trust is wound up the Trustees should notify the Inland Revenue Trusts office and complete a tax return for the period up to the date the trust is wound up.

Remember, you will need to

  • make provision for any tax that may be due

  • consider whether the ending of the trust gives rise to a capital gains tax liability.

If the property of the trust is distributed before any outstanding tax is paid then you might have to pay that tax out of your own pocket.

The information given does not provide specific advice and may not be suitable to your individual circumstances.

Please not that the Financial Services Authority do not do not regulate some forms of Trust products & services. These services are provided by our sister company Countrywide Tax & Trust Corporation Ltd

 

THE FOUR TYPES OF TAXATION

Corporation tax

Corporation tax is paid by limited companies on their profits.

Corporation tax is not payable by the self-employed but does apply to the following organisations, even if they are not limited companies:

  • members' clubs, societies and associations

  • trade associations

  • housing associations

  • groups of individuals carrying on a business but not as a partnership, eg co-operatives

There are two rates. The two rates of corporation tax - the small companies' and main rate - relate to a level of profit.

When a company's profit level changes from the small companies' rate to the main rate, marginal relief is available to ease the transition.

The table below shows the rates for 2013/14.

ProfitsRate appliedRate payable on profits earned from 1 April 2010

Up to £300,000Small companies' rate20 per cent

£300,001 - £1,500,000Marginal relief from main rate between23.75 per cent

£1,500,000+Main rate23 per cent


Ring fence companies

*For companies with ring fence profits (income and gains from oil extraction activities or oil rights in the UK and UK Continental Shelf) these rates differ. The Small Profits Rate of tax on those profits is 19 per cent and the ring fence fraction is 11/400 for financial years starting 1 April 2008, 2009 and 2010. The main rate is 30 per cent for financial years starting on 1 April 2009, 2010 and 2011.

Capital Gains Tax

CGT is a tax on capital 'gains'. If when you sell or give away an asset it has increased in value, you may be taxable on the 'gain' (profit). This doesn't apply when you sell personal belongings worth £6,000 or less or in most cases, your main home.

You may have to pay CGT if for example, you:

  • sell, give away, exchange or otherwise dispose of (cease to own) an asset or part of an asset

  • receive money from an asset - for example compensation for a damaged asset

You don't have to pay CGT on:

  • your car

  • your main home - provided certain conditions are met

  • ISAs or PEPs

  • UK Government gilts (bonds)

  • personal belongings worth £6,000 or less when you sell them

  • betting, lottery or pools winnings

  • money which forms part of your income for income tax purposes

These are some points to bear in mind:

  • if you are married or in a civil partnership and living together you can transfer assets to your husband, wife or civil partner without having to pay CGT

  • if you make a loss you may be able to make a claim for that loss and deduct it from other gains, but only if the asset normally attracts CGT - for example you cannot set a loss on selling your car against gains from disposing of other assets

  • if someone dies and leaves their belongings to their beneficiaries, there is no CGT to pay at that time - however if an asset is later disposed of by a beneficiary, any CGT they may have to pay will be based on the difference between the market value at the time of death and the value at the time of disposal

  • Each tax year you have an annual tax-free allowance-know as the 'Annual Exempt Amount'. You only pay tax on total net gains above this amount, using the Capital Gains Tax rate for that tax year. 

  • Nearly everyone who lives in the UK will get the Annual Exempt Amount. There are different Annual Exempt Amounts for individuals (including personal representatives) and most trustees. The amounts are set for each tax year. Currently the allowance for most Trustees is half the individual's allowance.


Rates for Capital Gains Tax

2013-14

·       18 per cent and 28 per cent tax rates for individuals (the tax rate you use depends on the total amount of your taxable income, so you need to work this out first )

·       28 per cent for trustees or for personal representatives of someone who has died

10 per cent for gains qualifying for Entrepreneurs' Relief

Inheritance Tax

A tax on the value of a person's estate on death and on certain gifts made by an individual during their lifetime. Broadly speaking your estate is everything you own at the time of your death, less what you owe. It's also sometimes payable on assets you may have given away during your lifetime. Assets include things like property, possessions, money and investments.

The inheritance tax threshold is the amount above which inheritance tax becomes payable. If the estate, including any assets held in trust and gifts made within seven years of death, is less than the threshold, no inheritance tax will be due on it.

It only applies if the taxable value of your estate is above the threshold which for 20013/14 tax year is £325,000. It is only payable on the excess above this nil rate band.

The rate at which Inheritance Tax is chargedon death  is 40%.

Income tax

Income Tax is a tax on income. Not all income is taxable - and you're only taxed on 'taxable income' above a certain level. Even then, there are other reliefs and allowances that can reduce your Income Tax bill - and in some cases mean you have no tax to pay.

Taxable income includes:

  • earnings from employment

  • earnings from self-employment

  • most pensions income (State, company and personal pensions)

  • interest on most savings

  • income from shares (dividends)

  • rental income

  • income paid to you from a trust


Non-taxable income

There are certain sorts of income that you never pay tax on. These include certain benefits, special pensions and income from tax exempt accounts. These are ignored altogether when working out how much Income Tax you may need to pay.

Income Tax rates 2013-2014 by tax band and type of income:

Income Tax bandIncome Tax rate on earned income (see note)Income Tax rate on savingsIncome Tax rate on dividends

£1 to £2,790
Starting rate:Not available10%* N/A see basic rate band

£1 to £32,010
Basic rate:20%20%10%

£32,011 to £150,000
Higher rate:40%40%32.5%

Over £150,000
additional rate45%45%37%



Because the rate of Income Tax you pay on savings is worked out after any non-savings income has been taken into account, if your non-savings income is less than the starting rate for savings limit (£2,790) - or if savings and investments are your only source of income - your savings income will be taxed at the 10 per cent starting rate up to the limit. But if you already have non-savings income which takes you above the starting rate, all of your savings will be taxed at the 20 per cent basic rate.


Remember, the tax band applies to your income after your tax allowances and any reliefs have been taken into account - you're not taxed on all of your income.


'Non savings income' includes income from employment or self-employment, most pension income and rental income.


'Dividends' means income from shares in UK companies.


Savings and dividend income is added to your other taxable income and taxed last. This means you pay tax on these sorts of income based on your highest Income Tax band.



The information given does not provide specific advice and may not be suitable to your individual circumstances.



 Please not that the Financial Services Authority do not do not regulate some forms of Trust products & services. These services are provided by our sister company Countrywide Tax & Trust Corporation Ltd

 

THE DIFFERENT TRUSTS AVAILABLE

There are a number of different sorts of trusts, but usually they fall into one of the following categories:

  • bare trusts

  • interest in possession trusts

  • discretionary trusts

  • accumulation and maintenance trusts

  • mixed trusts

What is a 'bare trust'?

A bare trust, also known as a 'simple trust', is one in which each beneficiary has an immediate and absolute right to both capital and income. The beneficiaries of a bare trust have the right to take actual possession of trust property.

The property is held in the name of a trustee, but that trustee has no discretion over what income to pay the beneficiary. In effect, the trustee is a nominee in whose name the property is held and has no active duties to perform.

Example:

Graham leaves his sister Julie some money in his will. The money is to be held in trust, with Julie entitled to the money and any income, such as any interest it earns. She also has a right to take possession of any of the money at any time.

This is a bare trust because Julie is absolutely entitled to both the capital (the original money settled in the trust) and the income (any interest earned).

What is an 'interest in possession trust'?

This type of trust exists when a beneficiary, known in this case as an 'income beneficiary', has a current legal right to the income from the trust as it arises. The trustees must pass all of the income received, less any trustees' expenses and tax, to the beneficiary.

A beneficiary who is entitled to the income of the trust for life, is known as a 'life tenant' (a 'liferenter' in Scotland) or as having a 'life interest' (a 'liferent interest' in Scotland).

The income beneficiary need not, and often does not, have any rights over the capital of such a trust. Normally, the capital will pass to a different beneficiary, or beneficiaries, at a specific time in the future or after a specific future event. Depending on the terms of the trust, the trustees might have the power to pay capital to a beneficiary even though that beneficiary only has a right to receive income.

A beneficiary who is entitled to the trust capital is known as the 'remainderman' ('fiar' in Scotland) or the 'capital beneficiary'.

Example:

Stephen is married to Karen. On his death Stephen's will creates a trust and all the shares he owned are to be held in that trust. The dividends earned on the shares are to go to Karen for the rest of her life, and when she dies the shares pass to the children or grandchildren. Karen has an 'interest in possession' in the trust as she is entitled to the income (the dividends) arising on it for the rest of her life. Unlike Juliet in the bare trust example,

Karen has no right to the capital, so when she dies the trust ceases and all the capital (the shares) passes to her children or grandchildren (the remaindermen or fiars).

What is a 'discretionary trust'?

Trustees of a discretionary trust generally have 'discretion' about how to use the income of the trust. They may be required to use any income for the benefit of particular beneficiaries, but the trustees can decide:

  • how much is paid

  • to which beneficiary or class of beneficiaries payments are made

  • how often the payments are made

  • what, if any, conditions to impose on the recipients

The trustees may, or may not, be allowed to 'accumulate' income within the trust for as long as the law allows rather than pass it to the beneficiaries. Income that has been accumulated becomes part of the capital of the trust.

The trustees can decide how to invest or use the money and any interest it earns to benefit the grandchildren. So, when the children are young, the trustees might decide to pay for music lessons for them. As they get older, the trustees might pay towards a wedding. After a specified number of years, the trustees wind up the trust and distribute all of the money to the children.

What is an 'accumulation and maintenance trust'?

An accumulation and maintenance trust is one in which the beneficiaries will become entitled to the property or at least the income when they reach a certain age (no more than 25). The trustees can use the income for the maintenance of the beneficiary before the date on which that beneficiary becomes entitled to the property or to an interest in possession in that property.

Trustees of an accumulation and maintenance trust are given power to 'accumulate' the income of the trust until a certain date, at which time the beneficiary, or beneficiaries, are entitled to the property of the trust or to the income arising from that property.

In England and Wales, the beneficiary (unless the terms of the trust say otherwise) becomes entitled to the income from the property held in the trust when he or she reaches age 18 and an interest in possession trust is created at that point.

The position in Scotland is different, as there is no equivalent entitlement to the income of the trust at age 18. However, Scottish law limits accumulation periods so accumulation and maintenance trusts will often end when the beneficiaries reach the age of majority.

Example:

James puts money into an accumulation and maintenance trust for the benefit of his grandson Andrew.

The trustees can make payments to Andrew from the trust for his maintenance and will accumulate any remaining income. The terms of the trust give Andrew the capital and any accumulated income at the age of 25. So on his 25th birthday Andrew is entitled to all the money at that date.

What is a 'mixed trust'?

A mixed trust is a mixture of more than one type of trust, for example:

  • an interest in possession trust and a discretionary trust, or

  • an interest in possession trust and an accumulation and maintenance trust

Example:

Two children benefit from an English accumulation and maintenance trust. Zoe reaches 18 while Sarah is still 14.

The part of the trust benefiting Zoe becomes an interest in possession trust while the part that benefits Sarah remains an accumulation and maintenance trust until she reaches 18. So, when Zoe reaches 18 the trust becomes a mixed trust.

What is a 'Settlor-interested trust'?

There are special tax rules for trusts in which the settlor 'retains an interest' in the trust, for example where the settlor receives income from the trust, but these are too specialised to be included in this. Our professional advisers will be able to provide you with more information about them.

 The information given does not provide specific advice and may not be suitable to your individual circumstances.

 Please not that the Financial Conduct Authority do not do not regulate some forms of Trust products & services. These services are provided by our sister company Countrywide Tax & Trust Corporation Ltd

 

HOW ARE TRUSTS TAXED?

There are a number of different sorts of trusts, but usually they fall into one of the following categories:

  • bare trusts

  • interest in possession trusts

  • discretionary trusts

  • accumulation and maintenance trusts

  • mixed trusts


What is a 'bare trust'?

A bare trust, also known as a 'simple trust', is one in which each beneficiary has an immediate and absolute right to both capital and income. The beneficiaries of a bare trust have the right to take actual possession of trust property.

The property is held in the name of a trustee, but that trustee has no discretion over what income to pay the beneficiary. In effect, the trustee is a nominee in whose name the property is held and has no active duties to perform.

Example:

Graham leaves his sister Julie some money in his will. The money is to be held in trust, with Julie entitled to the money and any income, such as any interest it earns. She also has a right to take possession of any of the money at any time.

This is a bare trust because Julie is absolutely entitled to both the capital (the original money settled in the trust) and the income (any interest earned).


What is an 'interest in possession trust'?

This type of trust exists when a beneficiary, known in this case as an 'income beneficiary', has a current legal right to the income from the trust as it arises. The trustees must pass all of the income received, less any trustees' expenses and tax, to the beneficiary.

A beneficiary who is entitled to the income of the trust for life, is known as a 'life tenant' (a 'liferenter' in Scotland) or as having a 'life interest' (a 'liferent interest' in Scotland).

The income beneficiary need not, and often does not, have any rights over the capital of such a trust. Normally, the capital will pass to a different beneficiary, or beneficiaries, at a specific time in the future or after a specific future event. Depending on the terms of the trust, the trustees might have the power to pay capital to a beneficiary even though that beneficiary only has a right to receive income.

A beneficiary who is entitled to the trust capital is known as the 'remainderman' ('fiar' in Scotland) or the 'capital beneficiary'.

Example:

Stephen is married to Karen. On his death Stephen's will creates a trust and all the shares he owned are to be held in that trust. The dividends earned on the shares are to go to Karen for the rest of her life, and when she dies the shares pass to the children or grandchildren. Karen has an 'interest in possession' in the trust as she is entitled to the income (the dividends) arising on it for the rest of her life. Unlike Juliet in the bare trust example,

Karen has no right to the capital, so when she dies the trust ceases and all the capital (the shares) passes to her children or grandchildren (the remaindermen or fiars).


What is a 'discretionary trust'?

Trustees of a discretionary trust generally have 'discretion' about how to use the income of the trust. They may be required to use any income for the benefit of particular beneficiaries, but the trustees can decide:

  • how much is paid

  • to which beneficiary or class of beneficiaries payments are made

  • how often the payments are made

  • what, if any, conditions to impose on the recipients

The trustees may, or may not, be allowed to 'accumulate' income within the trust for as long as the law allows rather than pass it to the beneficiaries. Income that has been accumulated becomes part of the capital of the trust.

The trustees can decide how to invest or use the money and any interest it earns to benefit the grandchildren. So, when the children are young, the trustees might decide to pay for music lessons for them. As they get older, the trustees might pay towards a wedding. After a specified number of years, the trustees wind up the trust and distribute all of the money to the children.


What is an 'accumulation and maintenance trust'?

An accumulation and maintenance trust is one in which the beneficiaries will become entitled to the property or at least the income when they reach a certain age (no more than 25). The trustees can use the income for the maintenance of the beneficiary before the date on which that beneficiary becomes entitled to the property or to an interest in possession in that property.

Trustees of an accumulation and maintenance trust are given power to 'accumulate' the income of the trust until a certain date, at which time the beneficiary, or beneficiaries, are entitled to the property of the trust or to the income arising from that property.

In England and Wales, the beneficiary (unless the terms of the trust say otherwise) becomes entitled to the income from the property held in the trust when he or she reaches age 18 and an interest in possession trust is created at that point.

The position in Scotland is different, as there is no equivalent entitlement to the income of the trust at age 18. However, Scottish law limits accumulation periods so accumulation and maintenance trusts will often end when the beneficiaries reach the age of majority.


Example:

James puts money into an accumulation and maintenance trust for the benefit of his grandson Andrew.

The trustees can make payments to Andrew from the trust for his maintenance and will accumulate any remaining income. The terms of the trust give Andrew the capital and any accumulated income at the age of 25. So on his 25th birthday Andrew is entitled to all the money at that date.


What is a 'mixed trust'?

A mixed trust is a mixture of more than one type of trust, for example:

  • an interest in possession trust and a discretionary trust, or

  • an interest in possession trust and an accumulation and maintenance trust


Example:

Two children benefit from an English accumulation and maintenance trust. Zoe reaches 18 while Sarah is still 14.

The part of the trust benefiting Zoe becomes an interest in possession trust while the part that benefits Sarah remains an accumulation and maintenance trust until she reaches 18. So, when Zoe reaches 18 the trust becomes a mixed trust.


What is a 'Settlor-interested trust'?

There are special tax rules for trusts in which the settlor 'retains an interest' in the trust, for example where the settlor receives income from the trust, but these are too specialised to be included in this. Our professional advisers will be able to provide you with more information about them.


The information given does not provide specific advice and may not be suitable to your individual circumstances.

Please not that the Financial Conduct Authority do not do not regulate some forms of Trust products & services. These services are provided by our sister company Countrywide Tax & Trust Corporation Ltd