Taxation of Trusts and Estates

The Settlor
Decides how the assets in the Trust assets should be managed. This is set out in a Trust Deed. The Trust Deed will usually appoint the Trustees, specify the beneficiaries and specify who, when and how much they can benefit. This is usually quite an in-depth document and it would be advisable to have this drawn up professionally as it will govern the Trust throughout the lifetime of the Trust.

The Trustee
The Trustees in effect “own” the Trust assets. Their role is to manage the assets in accordance with the Trust Deed. This will usually involve dealing with the day to day management of the assets, declaring and paying any tax due on the Trust, dealing with the investment of the Trust assets, accounting to the beneficiaries and sometimes using their discretion to decide how best to manage the Trust (if this is provided for in the Trust Deed).

The Beneficiaries
The beneficiaries benefit from the Trust under the terms of the deed or at the Trustees discretion. They may receive the income of the Trust, or the capital or both.

Income Tax
For a Bare Trust the beneficiary is responsible for paying the income tax. For all other types of Trust the Trustees are responsible. Trustees are responsible for paying tax on the income received by a Trust at the specific rate applying to Trusts. Sometimes the Trustees might “mandate” all the income to a specific beneficiary meaning the beneficiary in that scenario would be responsible for the income tax.

Capital Gains Tax
Capital Gains Tax (“CGT”) might be payable by the settlor on setting up a Trust if the settlor is transferring or selling an asset to the trust which has gained in value since the settlor acquired it. This is an important factor to consider when setting up a Trust.
CGT can also be payable when an asset leaves a Trust or is sold within a Trust. It would be the responsibility of the Trustees to declare and settle any CGT payable on the Trust. They would only have to pay CGT if the gain exceeds their annual allowance (currently half the individual allowance or a full allowance if the Trust qualifies for special tax treatment – usually if it is set up for a vulnerable beneficiary).

Inheritance Tax
Inheritance Tax (“IHT”) might also be payable by the settlor when setting up a Trust depending on whether any exemptions apply. IHT may also be payable by the Trustees when the Trust reaches its 10 year anniversary. The calculation can be quite complicated but, in very general terms, the amount that is charged to tax is based on the value of the Trust fund immediately before the 10 year anniversary. IHT may also be payable by the Trustees when assets leave the Trust or the Trust ends (exit charges). IHT is payable on “relevant property” such as houses, shares, money – this includes the assets in most Trusts.

Creating a Trust is an important matter and has lasting legal and tax consequences. The Trust, once created, is irrevocable and the Trust assets must be held according to the terms of the Trust. The Trustees will be in control of the operation of the Trust.

*The above information applies for the tax year 2020-21

Income Tax
For a Bare Trust the beneficiary is responsible for paying the income tax. For all other types of Trust the Trustees are responsible. Trustees are responsible for paying tax on the income received by a Trust at the specific rate applying to Trusts. Sometimes the Trustees might “mandate” all the income to a specific beneficiary meaning the beneficiary in that scenario would be responsible for the income tax.

Capital Gains Tax
Capital Gains Tax (“CGT”) might be payable by the settlor on setting up a Trust if the settlor is transferring or selling an asset to the trust which has gained in value since the settlor acquired it. This is an important factor to consider when setting up a Trust.
CGT can also be payable when an asset leaves a Trust or is sold within a Trust. It would be the responsibility of the Trustees to declare and settle any CGT payable on the Trust. They would only have to pay CGT if the gain exceeds their annual allowance (currently half the individual allowance or a full allowance if the Trust qualifies for special tax treatment – usually if it is set up for a vulnerable beneficiary).

Inheritance Tax
Inheritance Tax (“IHT”) might also be payable by the settlor when setting up a Trust depending on whether any exemptions apply. IHT may also be payable by the Trustees when the Trust reaches its 10 year anniversary. The calculation can be quite complicated but, in very general terms, the amount that is charged to tax is based on the value of the Trust fund immediately before the 10 year anniversary. IHT may also be payable by the Trustees when assets leave the Trust or the Trust ends (exit charges). IHT is payable on “relevant property” such as houses, shares, money – this includes the assets in most Trusts.

Creating a Trust is an important matter and has lasting legal and tax consequences. The Trust, once created, is irrevocable and the Trust assets must be held according to the terms of the Trust. The Trustees will be in control of the operation of the Trust.

*The above information applies for the tax year 2020-21

Our tax planning and Trusts solicitors offer a full range of services for tax planning, Trust creation and Trust management.