You will be putting money in a trust because of the following reasons:
- You want your hard earned money to be given to your children when you die and you do not want them to use it irresponsibly and therefore retain some control over your wealth.
- You want to reduce the amount of inheritance tax by reducing the amount of your net estate.
- You want your children to be benefitted from your wealth but at the same time you do not want to reduce their chances of getting a financial aid (such as student loan etc.)
When you put money in a trust it no longer belongs to you. So for example, if there is an income generating asset in a trust such as shares, the income coming from the shares won’t belong to you and therefore you the creator of the trust (the settlor) won’t have to pay any income tax.
INCOME TAX
There are different types of trust and each trust have different set of rules.
In case of a discretionary trust, it will be the responsibility of a trustee to pay the income tax. If there are more than one trustee then one trustee can be elected and made responsible for paying taxes. However, in case the trust fails to pay the taxes, all trustee can be held responsible for not paying taxes.
A trustee needs to register themselves with HMRC when they are liable to pay the taxes. All the gains and the income should be reported in the annual Self-Assessment tax return and reported to HMRC. If you think you need an accountant for this you can call us at 020 8127 0728 or drop a message here and we will get back to you.
Click here to find out the tax rates.
IS INHERITANCE TAX PAID ON THE ASSETS IN A TRUST?
For different types of trusts there are different inheritance tax rules. For discretionary trusts inheritance tax will be paid on the following occasions:
- 20% inheritance tax will be charges on the value of the asset which is in excess of the personal allowance.
- After every 10 years the assets in a trust needs to be revalued and 6% IHT will need to be paid on the revalued assets after deducting the IHT allowance.
- If the assets are removed from the trust 6% IHT will need to be paid on the exit.
WHEN A CAPITAL GAINS TAX NEEDS TO BE PAID?
A capital gains tax needs to be paid by the settlor when the assets are transferred in the trust.
When the trustee makes a gain on the disposal of an asset on behalf of the beneficiary. However, no CGT will be paid on the disposals or transfers of assets help in the ‘Bare trust’ and ‘Interest in possession trusts’.
Capital Gains tax will also be paid by the trustee when the beneficiary becomes entitled to the asset. The CGT will be paid based on the market value. The calculations of CGT can be complicated, it might be worth hiring an accountant and we at Taxaccolega can help you explain the tax implications of your disposals and expenses and the reliefs you can use to reduce your CGT bill.