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Trust Taxes

The use of a trust can be a useful asset protection or tax planning vehicle.  However, trusts are subject to separate tax rules compared to individuals and therefore these need to be considered to ensure that the operation of the trust is fully compliant.

The most common type of trust is a discretionary trust and we have detailed the main tax considerations below.  However different types of trust may have different tax implications and these should be considered at an early stage.

Income Tax For Discretionary Trusts

The trustees are responsible for completing and submitting a self assessment tax return each year detailing the trust’s taxable income.

The rules for calculating the trustees’ tax liability can be complex.  As for individuals, different rates of income tax apply to different types of income. The standard basic rate of income tax applies to income below £1,000 (exact rate depends upon the type of income) whilst the highest rate of income tax applies to taxable income above £1,000.

In addition to the above, careful consideration needs to be given to the level of income distributed to beneficiaries as this can sometimes incur an additional liability, albeit that this can often be reclaimed by the beneficiaries.

Capital Gains Tax For Discretionary Trusts 

Similar to individuals, trustees are subject to capital gains tax and a number of reliefs can be available such as business asset disposal relief in certain situations.

The trustees are entitled to a tax-free allowance each year which is half of the allowance applicable to individuals.  The highest rates of capital gains tax are payable by trustees for gains on residential property and all other gains.

Inheritance Tax For Discretionary Trusts

Trustees of discretionary trusts may have a liability to inheritance tax or to complete an inheritance tax return in a number of different circumstances.  The main occurrences are when assets are transferred out of the trust and when the trust reaches a ten year anniversary of its establishment.

The calculation of the inheritance tax (if any) arising can be complex and it is important to plan for these events to ensure that the tax implications and reporting requirements are understood.

For more information please contact us.

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