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Why set up a Trust?
• To make provision for children/ grandchildren
• To provide support for vulnerable person
• To ensure children do not receive money assets until
mature?
• To keep family assets within the bloodline – concerns
about spouse? Bad marriage?
• Tax planning!
Why set up a trust?
Grandad
Historically Trust Assets not in Estate
Disc Trustassets
• Grandad
• Transfers assets
• G’dad dies – Dad is beneficiary
• No tax on trust assets
• Dad dies – I am beneficiary
• No tax on trust assets
• I die – Son is beneficiary
Historically Trust Assets not in Estate
Disc Trust
By P
ass E
sta
tes
assets
• 1889 - Estate Duty – “voluntary” tax
• 1975 – Capital transfer tax – introduced 10 year charge
on discretionary trusts
• 1986 – Inheritance tax
• Assets in discretionary trust still not taxed on individuals
Tax on the Estate
• Control – parents can
be trustees
• Flexibility – Powers to
amend beneficiaries if
within “class”
• Protection – from
creditors of beneficiary,
divorce
Trusts –Pros and Cons
• Complicated – do clients
understand?
• Expensive – set up and
ongoing fees
• Uncertain – future
changes in tax rules?
Setting up a Trust
Settlor Trustees – run
trust
Beneficiaries:
Receive income/capital
Settlor, Trustees, Beneficiary
Trust
words - a clear indication that a trust is being
set up
subject matter - the property that has been
settled
object - who is the beneficiary
• Suitably qualified lawyer should draft the trust deed
Express Trust – 3 Certainties
1964 change allowed the trust instrument to specify a
flat period of up to 80 years before the interest vests.
Alternatively ‘lives in being plus 21 years’.
Trusts often used 21 years after the death of the last
survivor of the descendants now living of a named
British monarch – the Queen!!
Trusts set up after 5 April 2010 - statutory period of 125
years
Trusts cant last forever
Different Types of Trust
Interest in possession/life tenant/ life renter
Discretionary trusts
Accumulation and Maintenance Trusts
Trusts for Minor Children
Will trusts
Bare Trusts
“Sham” Trusts
Settlor- Interested Trusts
Main types of Trust
Beneficiary has present right to present enjoyment of
trust property
Referred to as Life Tenant (life renter)
E.g. Right to live in house for rest of life
Or receive income from trust assets
At specified time capital passes to Remainderman
No power to accumulate income
If there is power to accumulate = discretionary trust
Interest in Possession (IIP) Trust
No beneficiary has present right to present enjoyment of
trust property
Trustees have discretion to apply trust income and
capital to a class of beneficiaries
Thus no one beneficiary deemed to own trust assets –
effective for IHT planning
Settlor may provide trustees with “letter of wishes”
Discretionary Trusts
Discretionary trust with privileged IHT treatment
Transfer to were PETs
No 10 year charges or exit charges
Typically used to pay school fees, maintenance of
young persons
Lost favoured tax status from 2006
Accumulation and Maintenance Trusts
Created under Will or intestacy
Could be IIP or Discretionary trust
IIP created on death = Immediate Post Death Interest
(IPDI)
IPDI not relevant property trusts so no 10 year charges
If IPDI for spouse then spouse exemption applies
Will Trusts
Bare trust - bare trustee holds as nominee for the
'beneficiary' and the property is simply treated as that of
the person beneficially entitled to it for CGT and IHT
Transfer to beneficiary at MV
“Sham” Trust - trustees had no intention of acting on
the terms of the trust, ineffective for tax purposes
Self-settlement/ Settlor interested trust - treated as
the settlor’s income and gains for tax purposes
Trust for minor child by parents – taxed on parents
Different Types of Trust
All new trusts and existing trusts to be registered with
HMRC
All trusts with a UK tax liability including trusts that are
outside the UK but have a UK tax consequence
Lead trustee to notify details and changes to TRS
TRS allocates UTR to the trust
Not required if no likelihood of income/gains
Trust Registration Service (TRS)
Details for settlor. trustees, beneficiaries:
name
correspondence address and other contact details
date of birth
National Insurance (NI) number or address if no
NINO available
if non UK resident, correspondence address and
passport or ID number with country of issue and
expiry date.
Trust Registration Service (TRS)
Trust Income Tax
• Interest in possession – life tenant entitled to income
• No power to accumulate
• Tax rate 20%, 7.5% on dividends
• Life tenant benefits from £2,000 dividend allowance and
7.5% etc tax rates and savings allowance
• Discretionary trusts – power to accumulate income
• Trust income taxed at 45%
• Amounts distributed are non-savings income
• Does not count as dividend or savings income
Trust income tax
• Interest in possession – no deduction for TMEs but
reduces amount available to beneficiary
• Discretionary trusts – TMEs allowed as deduction
(grossed up) in arriving at income taxed at 45% rate
• Discretionary trust gets £1,000 standard rate band –
dividends taxed at 7.5%, other income 20%
Trust Management Expenses
• The Simpson Family Trust was set up to provide income to Bart up
to age 21. During year 2019/20 the trust received dividends from
UK companies of £1,000 and bank interest of £5,000. Expenses of
£1200 were also incurred by the trustees in managing the trust.
• The trustees income tax liability would be:
• Dividend income £1,000 @ 7.5% £75
• Interest income £5,000 @ 20% £1,000
• Total liability £1,075
•
• Thus the net income for distribution to the beneficiary is £3,725
Income tax – IIP trust
• TMEs of £925 (92.5%) are firstly set against the dividend income leaving
£275 to set against the savings income.
• The gross amount required to pay the £275 is £343.75 ( gross by 100/80)
• Thus bank interest taxable at trust rate is £4,656.25 less £1,000
• Tax liability of the trustees would be: £
• £1,343.75 TMEs taxed as 20% 268.75
• £1,000 dividends taxed at 38.1% 381.00
• £3,750 taxed at special trust rate 45% 1,687.50
• Total liability 2,295.01
• Note that trustees now receive bank interest gross.
Income tax – IIP trust
• Trustees need to keep a record of income tax paid in
what is known as the ‘tax pool’.
• Tax pool consists of tax paid at 7.5%, 20%, 38.1%,45%.
• When they make an income distribution to beneficiaries,
they must have enough in the tax pool to cover the 45%
credit
• If not the trustees must make up the difference.
Discretionary Trusts – “Tax Pool”
• Problem with dividend income
• Trustees receive a dividend of £10,000,
• Tax at 38.1%, ignoring the standard rate = £3,810 will
go into the tax pool.
• If pay the remaining £6,190 to a beneficiary, they must
pay this with a 45% tax credit i.e. £5,060 (£6,190 x
45/55).
• Can only do this if there is at least £5,060 in the tax
pool.
Discretionary Trusts – “Tax Pool”
• £3,810 of this is tax on dividend itself, but the balance
must come from tax pool - previous income (if any)
• If so the beneficiary will receive £6,190 in their hand
with a tax credit of £5,160 i.e. £11,350 gross.
• If only have £3,810 in the tax pool, they must pay an
additional £690 in tax. This means that the beneficiary
will only receive £5,500, with a tax credit of £4,500 i.e.
£10,000 gross.
• Alternatively, restrict the payment to the amount of
credit in the tax pool, and the beneficiary would receive
£4,660 with a tax credit of £3,810 (£8,470 gross)
Discretionary Trusts – “Tax Pool”
CGT and Trusts
Transfers in
Transfers out
Hold over?
BAD relief?
• Settlor is connected with trustees
• MV rule will apply
• Disposal even if transfer from settlor as individual to
settlor as trustee
• Availability of CGT holdover
• If Business assets or IHT chargeable transfers
• FA 2006 means most lifetime transfers into trusts
can be held over – and transfers out
CGT on Property entering settlement
• Settlement gets £6150 annual exempt amount
• Divided by number of settlements created by same
settlor
• Limited to £1,230
• Normal computational rules apply
• 20% CGT rate applies
• 28% on residential property
CGT on Sales of Trusts Assets
• S71(1) – absolute entitlement of beneficiary = deemed
disposal and reacquisition by trustees at MV (held as
bare trustee for beneficiary)
• CG crystallises
• S71(2) – losses c/fwd to beneficiaries
• Holdover possibility (s260)
• Again, business asset or immediately chargeable
Property leaving trust other than on sale
• Assets used for the purposes of a trade
profession/vocation carried on by:
• The transferor or
• His personal company or
• A member of the trading group of which the holding
company is his personal company.
• Plus Shares in trading company
• Now linked to “trading company” 20% test
S165 business gift holdover relief
• Where shareholder has >25%
• or personal company
• Restrict gain available for holdover
• To MV chargeable business assets portion
• MV CBA
• MV all CA
• Goodwill? Old or new?
CBA/ CA restriction
• Dad 55% shareholder transfers 10% to trust
• Market values of company assets:
• Business premises 350,000 CBA
• Fixed plant 50,000 CBA
• Goodwill 1,100,000 CBA?
• Investments 200,000 CA
• Other net assets 300,000
• Total value 2,000,000
• < 20% thus trading company
CBA/ CA restriction – Example
• Business premises 350,000 CBA
• Fixed plant 50,000 CBA
• Goodwill 1,100,000 CBA
• 1,500,000
• Investments 200,000 CA
• Total chargeable assets 1,700,000
• S165 holdover restricted to 88.2%
• If gain £39,990 then £4,705 chargeable (< annual exemption)
Old Goodwill – Bloggs Trading Ltd
• Business premises 350,000 CBA
• Fixed plant 50,000 CBA
• 400,000
• Investments 200,000 CA
• Total chargeable assets 600,000
• S165 holdover restricted to just 66.7%
• If £39,990 gain = £13,330 chargeable > AE
New Goodwill – Bloggs Trading Ltd
• Gift of any asset where there is immediate IHT charge
• Lifetime transfer to most trusts now
• If < £325,000 then no IHT (< nil band)
• Also transfers out of trust
• Planning opportunity?
S260 TCGA gift relief
• S260 TCGA – hold over gain where there is IHT charge
e.g. transfer into and out of trust
• Simple planning technique – Example
• Charlie wants to give daughter £300K investment
property. Base cost £100K
• CG = major deterrent
• Gain = £200,000 – 28% CGT = £56,000
Passing on a Buy to Let using a trust
• Chharlie transfers property into trust = if immediately
chargeable = CG holdover (s260 TCGA)
• IHT charge? – likely to be within nil rate band (£325K)
• Property into trust for daughter without tax charge
• No CGT, no IHT
Passing on a Buy to Let property
• Property in trust
• If trust is felt to be inappropriate…
• Wait at least 3 months…
• …. Or if trust suits, for longer but less than 10 years
• Appoint out property to daughter
• Holdover under s260 TCGA on way out – No CGT
• If gifted directly no holdover = CGT for Charlie
Passing on a Buy to Let Property
• S165 and s260 hold over denied
• Where transfer to settlor interested trust
• (= Settlor, spouse or minor child now)
• Relief also clawed back if becomes settlor interested
• Within 6 years of end of tax year of transfer
• Cannot claim holdover relief and PPR where property
transferred into/out of trust
Anti-avoidance
• Trustees get PPR if beneficiary lives in house
• Martyn’s daughter Hannah – buy flat in Manchester? 3
options:
• 1. Martyn buys – not PPR
• 2. Hannah buys, Martyn as guarantor (her PPR)
• 3. Buy via trust – PPR available to trustees
• (With 3, Martyn should not lend funds to trust – could
invoke the settlements rule – he should guarantee the
Trust borrowing or settle funds absolutely)
Child at University? Extra PPR
• Trustees can get BAD on disposal of trust business
assets if IIP trust and beneficiary qualifies
• Thus doesn’t apply to discretionary trusts
1. The trustees of a settlement dispose of “settlement
business assets”
2. An individual is a “qualifying beneficiary” of the
settlement
3. One or other of two “relevant conditions” is satisfied
Business Asset Disposal (BAD) Relief?
• The first “relevant condition” applies where trust
disposes of shares in or securities of a company and
for two years prior to disposal:
beneficiary’s "personal company"
trading company or the holding company of a trading
group; and
beneficiary must be an officer or employee of the
company or of one or more companies that are
members of the group.
Business Asset Disposal (BAD) Relief?
• The second “relevant condition” applies where trust
disposes of assets, that have been used for the
purposes of a business :
throughout a period of 2 years ending within the 3
years up to the date of the disposal, the settlement
business assets must be used for the purposes of a
business carried on by the qualifying beneficiary, and
the qualifying beneficiary must cease to carry on the
business at some time during that 3 year period.
Business Asset Disposal (BAD) Relief?
• Derek is the controlling shareholder of a successful
trading company Bench Ltd
• He is managing director and owns 600 of the ordinary
share capital (60%) which he inherited from his father.
• He is also the beneficiary of an interest in possession
trust set up by his father that owns a further 200 shares
(20%) in Bench Ltd.
• The remaining 200 of the company’s shares are owned
by Derek’s wife.
• In August 2020 the company is sold for £2 million
(£2,000 a share)
Sale of shares by Trustees – BAD?
• Probate value £500 a share, £500,000 in total.
• Derek’s gain of £1,500 a share = £900,000.
• His first claim for Business Asset Disposal Relief
• Trustees gain = £300,000 relative to the probate value
• Only £100,000 of the trust gain qualify for BAD relief
• Restricted to Derek’s £1 million lifetime limit.
Sale of shares by Trustees – BAD?
Inheritance Tax and Trusts
Grandad
Historically Trust Assets not in Estate
Disc Trustassets
• Grandad
• Transfers assets
• G’dad dies – Dad is beneficiary
• No tax on trust assets
• Dad dies – I am beneficiary
• No tax on trust assets
• I die – Son is beneficiary
Historically Trust Assets not in Estate
Disc Trust
By P
ass E
sta
tes
assets
trusts
Lifetime gift
>Nil band
Then tax at 20%
Tax at 10-year
Anniversaries
6% max
Exit charge
6% max
Trusts – 3 occasions of charge
• Relevant Property Trusts
• From 18.3.2006 most trusts including interest in
possession settlements
• 3 occasions of charge:
• Transfers into – not a PET
• 10 year anniversary/principal charge
• Exit charge when capital paid out
IHT and Trusts
• = Life tenant trust, life interest
• Life tenant deemed to own capital value supporting the life interest – in estate for IHT
• PET on creation, no 10 year or exit charges
• Old rules continue to apply until end of life interest –PET when capital appointed
• New IIPs – do not form part of estate unless IPDI, Trust for disabled, transitional serial interest – but relevant property trust now
Interest in possession trusts (IIP)
• = IIP created under Will or intestacy where
• Beneficially entitled to IIP on death, and
• Settled property not Trust for Bereaved Minor
• Settled property not trust for disabled person
• Property forms part of beneficiary’s estate for IHT
• Not a relevant property trust
Immediate post death interests
(IPDI)
• Set up under
• Will of deceased parent (or under D of V)
• Or Criminal Injuries Compensation scheme
• ( or convert old A&M trust)
• Minor = < 18 and at least one parent has died
• Also possible to set up under intestacy of grandparent if one of his children has predeceased him
• E.g X dies intestate, child A has predeceased and A’s 2 children B and C are minors
• Trusts for B and C would qualify as TBM
Trusts for bereaved minors (TBM)
• No IHT charges provided minor takes trust property
absolutely on or before age 18
• No IHT charge on death of bereaved minor
• IHT charge applies if TBM conditions cease to apply, or
trustees make disposition that reduces trust capital (=
exit charge)
TBM – IHT charges
• 1st IHT charge on old A&M trust cannot be until
beneficiary is 25 years old
• Max charge for old trusts 18 => 25 = 7 years
• 7/10 x 6% = 4.2% (based on initial value)
• Leave assets in trust and pay tax?
• OR distribute at 18?
Old A&M and 18-25 Trusts
• Most trusts now taxed as discretionary (relevant
property) trusts:
• Chargeable on transfers in (20%)
• Principal charge every 10 years (6%)
• Exit charges - capital paid out
• Now applies to A&M and IIP trusts
IHT charges on Relevant Property Trusts
• Created on death by parent for minor child who is
entitled to assets at 18 (TBM)
• Created on death for benefit of one life tenant who
cannot be replaced and trust capital vests absolutely at
end of life interest (IPDI)
• Created during life or on death for disabled person
But not these trusts
• 1 May 2010 Sid settled £250,000 cash and investments
to be held on discretionary trust.
• Sid’s previous cumulative chargeable transfers since 1
May 2003 of £50,000.
• Cumulative total at 1 May 2010 < £325,000 NRB = no
IHT on the initial transfer
• 2 May 2015 - £25,000 advanced to his son Chris.
• Exit charge? Apply the n/40 proportion (20/40 here) to
the initial charging rate.
• As initial charging rate was 0% there would be no IHT
Relevant property trust example
• At 1 May 2020 trust property was valued at £500,000
• On 19 May 2023 the trust property is distributed to Mike
when it is valued at £600,000.
• 1 May 2020 10 Year Anniversary Charge:
• Assumed transferor's cumulative total:
Relevant property trust example
i) value of chargeable transfers made by settlor
in 7 year period ending on settlement date
50,000
ii) amounts on which Exit charges have been levied
in 10 years before the anniversary
25,000
£75,000
• At 1 May 2020 trust property was valued at £500,000
• Effective rate 50,000/500,000 = 10%
• £500,000 x 10% x 30% = £15,000
Relevant property trust example
Gross
£
Tax
£
Assumed Cumulative Total 75,000 -
Assumed transfer 500,000 50,000
£575,000 £50,000
• On 19 May 2023 the trust property is distributed to Mike
when it is valued at £600,000.
• Effective rate at last 10 year anniversary = 10%
• Appropriate fraction is number of complete quarters
since last 10 year anniversary = 12/40.
• IHT is payable at appropriate fraction of effective rate in
the value of the property advanced
• = £600,000 x 10% x 30% x 12/40 = £5,400
Relevant property trust example
• 10 year charges might not be too much of an issue
• If shares in family trading company/ farm then 100%
BPR/APR means no ten year charge – but will 100%
continue to apply?
• No BPR - Maximum 6% each 10 years
• Pre 10 year anniversary appointment? (9 years 364
days)
• If initial charge 0% then exit charge at 0%
Trust tax planning – BPR and APR
• 100% on unquoted shares + AIM
• 50% for control of quoted co.
• 100% on partnership interest, sole trader
• 50% on assets used in company (controlled) or
partnership
• Not investment businesses – Holiday lets???
Business property relief
A “double dip” – business property/ farm
Widow
Beneficiaries:
Widow
Children
Discretionary
Trust
A “double dip” – 2 X BPR
Widow
BENEFICIARIES :
- WIFE
- CHILDREN
Disc Trust
BPR/APR
&
NIL BAND
INVESTMENTS
CASH, HOUSE
“double dip” – 2 X BPR
Widow
BENEFICIARIES :
- WIFE
- CHILDREN
DISC TRUST
BPR ETC
&
NIL BAND
INVESTMENT
ETC
OPTION TO BUY BPR
Planning for Nursing Home
Costs
• Means testing applies – determines how much payable
• Where assets exceed £23,250
• Transfer assets to trust?
• Deliberate deprival of capital?
• Timing? Local authority (LA) can recover any sums it
consequently has to pay towards the resident’s care
costs from the person who the asset was transferred to,
as long as the deliberate deprivation occurred within 6
months of the resident approaching the LA for funding
Planning for Nursing Home Costs
a lump-sum payment such as a gift or to pay off a debt
transferring the title deeds of a property
putting money into a trust that cannot be revoked
converting money into another form that has to be
disregarded from the means test, eg personal
possessions, investment bonds with life insurance
reducing capital through substantial expenditure on
items such as expensive holidays or extravagant living.
Deliberate Deprival of Capital
• Assessment of Resources Regulations - no set time
limit beyond which the LA has to ignore transfers of
assets
• If a transfer more than six months before the resident
applies for assistance the LA can still treat him or her as
having deliberately deprived themselves of that capital
under the charging regulations.
• They may initially refuse to fund the resident,
necessitating a challenge or if they do provide funding
they may treat the assistance provided as an accruing
debt owed by the resident to LA
Planning for Nursing Home Costs
