An at a glance guide to UK trusts and the trust registration service (TRS). Subscribers see here for UK trusts and here for Non-resident trusts.

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

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 the value you transfer into the trust will not leave your estate and can still be subject to IHT on your death.
  • 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 including:

  • Where income not capital is distributed by the trustees to a beneficiary.
  • Where the trustees pay certain costs or expenses.
  • Where there is a transfer of excluded property.

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.

  • If you as Trustees agree to pay the exit charge, the rate of tax has to be grossed up as the loss to the trust is not just the distribution, it includes the inheritance tax too.

IHT Reporting requirements

  • Exit charges need to be reported to HMRC using form IHT100 (Inheritance Tax account).
  • 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

  • The settlement qualifies as an excepted settlement, or
  • The value of the transfer (before reliefs) is no more than 80% of the nil-rate band in force.

Income tax

  • UK resident trusts are taxed on their worldwide income.
  • Discretionary trusts are taxed on their income at the higher rate of tax (45%).
    • The tax paid is pooled; when income is paid out to beneficiaries it comes with a 45% tax credit.
    • Beneficiaries can reclaim the difference between their own marginal rate and the 45% tax credit.
    • As a trustee you must give form R185 to the beneficiaries to show the tax deducted.
    • If the tax pool does not cover the 45% tax credit, the trustees must make a payment to HMRC.
    • 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 (50% of the individual exemption).
  • A transfer into and out of trust is deemed to be at market value for CGT purposes.

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

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.

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 (automatically paid) to a beneficiary.

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.

Trust Registration service

From July 2017 trusts with UK tax liabilities must be registered with HMRC under an Online registration system.

  • Tax liabilities means income tax, CGT, IHT, SDLT, Scottish Land and Buildings Transaction Tax, and stamp duty reserve tax but not, it seems Welsh Land Transaction tax (LTT).
  • Trusts with liabilities for income tax, CGT and IHT alongside IT and CGT must register by no later than 5 October following the tax year in which the settlement is created or the tax liability starts.
  • Trusts with other tax liabilities must register by 31 January following the end of the tax year in which the liability starts.
  • Existing trusts (prior to TRS) with a UTR should have registered online by 5 March 2018.
  • The online record must be kept updated for changes in the beneficiaries and trustees; this service is not yet available. Changes should currently not be notified to HMRC unless a change is required to the lead trustee’s details; these should be notified to HMRC by letter. Until the online system allows corrections there will be no penalties for failing to notify changes to HMRC.
  • Agents can register to use the service here.
  • Late filing penalties apply which will be tax-geared if the registration is more than 6 months late.
  • Personal representatives of complex estates must use the TRS to register the estate with HMRC.

What's new?

HMRC has published a new 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.

5MLD

The trusts register is expected to be expanded as part of the UK's compliance with the EU Fifth Money Laundering Directive (5MLD) from March 2020; this would require certain types of trust to report to HMRC through the TRS, whether they have UK tax liabilities or not:

 

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