Trusts and Income Tax

36054909 - golden coin in hand vector concept in flat styleIn recent weeks we’ve spoken at length about trusts and their various forms, such as parental trusts for children, and trusts for vulnerable people, as well as taking a deeper look at trustee responsibilities in general.

It’s now time to turn our attention to the issue of trusts and income tax; that is, what income tax is due on various different types of trust, and what allowances are there, if any, to offset these figures.

Accumulation or Discretionary Trusts

If you’re the trustee of an accumulation or discretionary trust it’s your responsibility to pay any income tax that is due. In accumulation or discretionary trusts the first £1,000 is taxed at 7.5% for dividend-type income, and 20% for other income. If the settlor (the person who places the assets into a trust) has two or more trusts, this £1,000 figure is divided between their trusts. If they have five or more trusts, each trust is allowed to have £200 taxed at the lower rate.

For trust income over the first £1,000 it is taxed at 38.1% for dividend-type income, and 45% for other income.

Bare Trusts

Unique among all other trusts in this list, bare trusts make it the responsibility of the beneficiary themselves to pay tax on the income accrued within them.

If you’re the beneficiary of a bare trust, this tax must be paid through your Self Assessment tax return.

Possession Trusts

In a somewhat simpler version of an accumulation or discretionary trust, if you’re the trustee of a possession trust you’re responsible to pay any income tax that is due, at a rate of 7.5% for dividend-type income, and 20% for other income.

If you choose/agree to mandate income to the beneficiary, with this income going directly to them rather than being passed through yourself (and other trustees, if applicable), it will be the beneficiary’s responsibility to pay tax on said income through their Self Assessment tax return.

Settlor-Interested Trusts

As the name suggests, with settlor-interested trusts it’s the settlor, not the trustee or beneficiary, who is responsible for dealing with the income tax due on a settlor-interested trust.

Despite this being the settlor’s responsibility, once again it is the trustee themselves who actually pays the income tax due on the trust. The exact rate of income tax will depend on the type of trust the settlor-interested trust is.

Note on Dividends

It should be noted that trustees of any of the aforementioned trusts don’t qualify for the new dividend allowance. For this reason, all trustees must pay the full income tax rate on all dividend-type income received through a trust.

Experienced Trust and Income Tax Accountants

To speak with a professional accountant to discuss what income tax is due on your trusts, or for anything else, contact us today on 020 8780 2349 or get in touch with us via our contact page to arrange a complimentary, no obligation meeting.

Trusts for Vulnerable People

Trusts for vulnerable people, also known as trusts for vulnerable beneficiaries, are a type of trust that can be set up for:

  • someone under eighteen whose parent(s) have died.
  • a disabled person who is eligible to receive a Personal Independence Allowance, Constant Attendance Allowance, or Armed Forces Independence Payment, even if they don’t receive any of these allowances.

Trusts, as we’ve been exploring in recent weeks, are a method of organising money, investments, land, or buildings (known collectively as assets) for a person or group of people, including children. But how are trusts for vulnerable people different from standard trusts, if at all?

Vulnerable Person Tax Treatment

59042400_sIn order for a beneficiary to be treated as a ‘vulnerable person’ for trust tax purposes they have to fill in, with help, if necessary, the Vulnerable Person Election (VPE1) form. The form must be signed by both the beneficiary and the trustee(s).

Income Tax Treatment

Trusts with a vulnerable beneficiary may receive a deduction in income tax payments.

To work out this deduction, the trustee(s) must calculate what tax would be payable if there was no deduction available, before calculating what income tax the vulnerable beneficiary themselves would have owed if the income from the trust had been paid to them as an individual. The difference between these two figures can be deducted.

Capital Gains Tax Treatment

Capital Gains Tax is only paid when assets within a trust with a vulnerable beneficiary are sold, transferred, exchanged, or given away, and the assets in question have increased in value above the ‘annual exempt amount’.

This figure currently sits at £11,100 for beneficiaries with a mental or physical disability, and £5,550 for others.

Inheritance Tax Treatment

Trusts for vulnerable people may get special tax treatment depending on their level of vulnerability, as defined by HM Revenue and Customs (HMRC), when the trust was set up, and how long the person who set up the trust continues to live after the trust is created.

These definitions are highly specific, so rather than restating the same information here we recommend you read through the different cases the Government have put forward here (scroll down to the ‘Inheritance Tax’ section).

Multiple Beneficiaries

Keep in mind: It’s possible for a trust to have multiple beneficiaries who are and aren’t deemed to be vulnerable people.

For this reason, and to keep everything above board, all income and assets for any vulnerable beneficiaries must be kept separate from income and assets for non-vulnerable beneficiaries, with only the vulnerable beneficiary’s income and assets being eligible for any special tax treatment.

When a vulnerable beneficiary dies or is no longer deemed to be vulnerable, the trustee(s) must inform HMRC as soon as possible.

Experienced Trust Accountants

To speak with a professional accountant to discuss trusts for vulnerable people, or for anything else, contact us today on 020 8780 2349 or get in touch with us via our contact page to arrange a complimentary, no obligation meeting.

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