A Trust Fund is held by Trustees for the benefit of a class of beneficiaries and no beneficiary is entitled to capital or income until the Trustees decide. As an exercise in protecting money for an individual or for tax planning or as a means to defer a decision as to who should benefit from the Trust fund it is ideal. The fact that one is a beneficiary of a Discretionary Trust cannot be taken into account in insolvency or divorce proceedings or by the DSS or Local Authority unless of course money is actually paid out to the beneficiary by the Trustees. Discretionary Trusts are subject to Inheritance Tax in three ways: -
- On creation
- on each ten year anniversary of the creation ofthe Trust; and
- on transfers out from the trust
Because a gift into a Discretionary Trust is a chargeable gift unless the value of the gift is within your nil rate band at the time of the gift, Inheritance Tax at 40% may be payable on part or all of the transfer. Once established the Trust is subject to Inheritance Tax at each ten yearly anniversary on the value of its capital at that date. Very often no tax is chargeable because the value of the Trust Fund is within the nil rate band. However for more valuable Trusts, the tax rate never exceeds 6% at current rate.
An exit charge is also payable when assets leave the Trust Fund and the amount of tax varies depending upon the length of time since the last ten yearly anniversary or the Trust creation whichever is later. Again, however the tax liability will not exceed 6% at current rate.
The Trust has its own identify for Capital Gains Tax which is levied currently at 28% and it also has its own exemption for Capital Gains Tax currently £5,300 per annum.
Income Tax within a Discretionary Trust is taxed at 50% (or 42.5% for dividend income) for all income received above £1,000. This first £1,000 is taxed at 20% (or 10% for dividend income) unless the creator of the trust (the Settlor) and has made more than one trust which remain in existence, in which case the figure of £1,000 is divided by the number of trusts made by the same Settlor.
Beneficiaries who receive income can reclaim the excess tax above their own tax rate or credit the tax against a higher rate.
Life Interest Trusts
Such Trusts are held to pay the income to a named beneficiary until a certain date commonly their death, re-marriage or a particular age. A Trust can be drafted to have a succession of life tenants (the beneficiary entitled to the income) but cannot last indefinitely and commonly will come to an end after 80 years if not before, when the capital of the fund will be distributed to one or more beneficiaries free from the trusts.
Trusts can be created by deed during one's lifetime or by Will. Should you wish to consider creating a trust please contact Nick Pinks who will be happy to advise you in the preparation of a suitable document and to discuss the tax implications in greater detail.
Please note that this summary is not intended to provide solutions to particular problems and readers should take advice with regard to their particular circumstances.