At a glance

At a glance

• A trust is created by a settlor, who transfers property into a trust, where it is held and administered by trustees. 
  • A trust is generally created by deed; it sets out the terms, the beneficiaries, and the trustees’ powers.
• They can be settlor interested or non-settlor interested. A settlor interested trust is where the person setting up the trust can benefit from the trust either directly or where their spouse or civil partner is a beneficiary.

Most trusts set up after 2006 are relevant property trusts subject to potential IHT charges (“the relevant property regime”):

• When assets are transferred into trust (chargeable lifetime transfers or CLTs).
• When payments are made out of the trust (to beneficiaries) (exit charges)
• On each ten-year anniversary of the trust (principal or periodic charges).

Special trusts for disabled persons, bereaved children and those between the ages of 18 and 25 are not under the relevant property regime

What's new?

With effect from 22 July 2020 under Finance Act 2020

• HMRC's established position that additions of assets by UK-domiciled (or deemed domiciled) individuals to trusts which were set up when they were non-domiciled are not excluded property will be enshrined in law.
• Property transferred between excluded property trusts at a time when the settlor of the transferor trust is UK-domiciled (or deemed domiciled), will cease to be excluded property.

HMRC has published a consultation ‘The Taxation of Trusts: A Review’ considering whether the current system for taxing trusts meets the principles of transparency, fairness, fiscal neutrality, and simplicity. No reforms have been suggested; the government has said it will consider the views and evidence presented and weigh up the options for targeted reforms accordingly.

Discretionary trust (DT)

A discretionary trust will have a wide class of beneficiaries, generally unnamed and can include unborn children.

• As a beneficiary of a DT you do not have any outright entitlement to the income or assets of the trust. It is entirely up to the trustees who benefits from the trust and by how much.
• As trustee of a DT you may have full discretion over the trust income and assets, depending on the trust deed.

Interest in possession or life interest (IIP)

Where there is an interest in possession, or life interest:

• If you hold that interest you are the life tenant and have an immediate right to the income of the trust to the exclusion of all others, it is your income.
• If you are a trustee you have no discretion in dealing with the trust income; you must pay it to the life tenant

Bare Trusts

These are informal types of trust. The income and capital of a bare trust belongs to the beneficiary; as trustee you have control but if the beneficiary asks for the assets to be transferred to them it is hard for you to refuse.

Trust residency 

A UK trust is one which:

• Is controlled by UK trustees or
• If the settlor was UK domiciled at the time of the settlement, has any UK trustees at all.
• As an individual trustee your residency is determined according to the statutory residence test.

Inheritance tax (IHT)

• A gift to a trust is a chargeable lifetime transfer for IHT and subject to an immediate tax charge at 20%, unless:
  • Reliefs apply.
  • It is within the donors (settlors) nil rate band (NRB).
  • It is excluded property.
• If you are a settlor and you retain an interest in the trust, see UK trusts for how this will affect the value of your estate and the IHT due when you die.
• Reliefs such as Agricultural property relief (APR) and Business property relief (BPR) can apply.

Excluded Property:

• If you are a settlor and you were non-UK domiciled when you set up the trust, excluded property includes foreign property.
  • If after 6 April 2017 you became UK domiciled or deemed domiciled and property is added to a trust you created when non-domiciled, this will not be excluded property.

Ten year charges

• The ten year charge is based on the value of trust property on the day before the tenth anniversary date.
• There will be an IHT charge if this value exceeds the nil-rate band on the anniversary date.
• The rate of IHT charged is 6%

Exit charges

When assets leave the trust, e.g. when distributions are made to beneficiaries, an exit charge is due:

• The charge is based on the capital value leaving the trust on the exit date.
• The rate of IHT is subject to a complex calculation factoring in the last ten-year charge.
• A charge is due if the value exceeds the nil rate band in force at the exit date, subject to prior exits in the previous seven years.
• In certain circumstances there is no exit charge. See UK trusts for more details.

If you are a trustee, you and the other trustees have responsibility for paying the tax on an exit; you can delegate this responsibility to the beneficiary if you wish.

• See UK trusts for what happens to the rate of tax if the Trustees agree to pay the exit charge.

IHT Reporting requirements

• Exit charges need to be reported to HMRC using form IHT100.
• The deadline for filing the return and paying the tax is six months after the end of the month in which the event occurs.
• Interest accrues on late payments.

Trustees are required to submit forms IHT100 even if there is no tax due, unless certain conditions are met.

• See UK trusts for what these conditions are.

Income tax

• UK resident trusts are taxed on their worldwide income.
• Discretionary trusts are taxed on their income at the upper rate of tax.
  • The tax paid is pooled; when income is paid out to beneficiaries it comes with a tax credit.
  • Beneficiaries can reclaim the difference between their own marginal rate and the tax credit.
  • See UK trusts for the trustees' obligations to beneficiaries regarding the tax paid on trust income and in the situation where the tax pool does not cover the tax credit due when a distribution is made to a beneficiary.
  • As trustees of a DT you can deduct certain expenses of managing the trust e.g. bank charges.

If you are a UK resident beneficiary with an interest in possession:

• The income is taxed on you as your own income. You must include it on your tax return.
• The trustees do not have to declare this income.

If you are the settlor and you have retained an interest in the trust:

• During your lifetime the income of the trust is taxed on you with no deduction for trust management expenses.

Capital gains tax (CGT)

• Trustees of UK resident trusts are taxable on worldwide trust gains.
• Trustees have a reduced annual exemption.
• A transfer into and out of trust is deemed to be at market value for CGT purposes.
• See UK trusts.

As a trustee you can claim certain CGT reliefs on trust gains, subject to certain conditions:

• Entrepreneurs relief (ER)
• Holdover relief 
• Private residence relief (PRR)

Holdover relief is important:

• A claim can be made on a transfer into or out of a trust.
• Assets do not need to be business assets.
• There are restrictions if the trust is settlor interested. See UK trusts.

Reporting requirements for income tax and capital gains tax

As a trustee you are required to file self-assessment returns for the trust in respect of income and capital gains.

• Unless the only source of income is savings interest and the tax liability is below £100 (for 2016/17 to 2020/21).
• Unless all income is mandated to a beneficiary. See UK trusts.

Stamp Duty Land Tax (SDLT)

A transfer into trust is a gift with no consideration; property can be put into or taken out of a trust with no SDLT charge unless the trustees/beneficiaries take on any borrowing attached to the property.

5MLD

The trusts register is to be expanded as part of the UK's compliance with the EU Fifth Money Laundering Directive (5MLD) from 10 January 2020. A consultation was opened into this in April 2019, with responses being published and a further consultation opened in late January 2020. The proposals will require all UK express trusts and some non EU express trusts to report to HMRC through an amended trust registration service (TRS) by 31 March 2022, whether they have UK tax liabilities or not.

Links to our useful guides:

UK trusts
Non-resident trusts
Trusts & Estates: Ten-year charge reporting requirements