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Practical points - trusts

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This page has been archived because it is no longer current information but is still relevant, or it is current but over 12 months old
  • Publish date: 04 January 2017
  • Archived on: 31 December 2017

Guidance from ICAEW's Tax Faculty for practitioners on the latest developments in practice, policy and legislation related to UK trusts.

   Practical points
157 Using the personal savings and dividends allowances
 

Trustees are not entitled to the personal savings allowance (PSA) or the dividend allowance (DA). The PSA is £1,000 tax-free for basic rate taxpayers, £500 for higher rate taxpayers and £0 for additional rate taxpayers. The DA (strictly, a nil rate band rather than an allowance) means the first £5,000 of dividends is taxed at 0%. Income distributed to beneficiaries of life interest or interest in possession trusts retains its characteristics as dividends, interest, etc, so the beneficiary will be able to take advantage of their own PSA and DA.

Income distributed from a discretionary trust is just trust income with a 45% tax credit and so any PSA or DA the beneficiary has available cannot be utilised against the distribution.

If the trustees are regularly distributing income to a beneficiary, for example to help with university fees and expenses, it may be appropriate to appoint a revocable life interest to that beneficiary in a suitable proportion of the trust fund. This would enable the trustees to just account for the basic rate/dividend rate of tax on that slice of the income which would retain its characteristics when distributed to the beneficiary meaning the PSA and DA can be utilised.

Appointing the interest on a revocable basis allows the trust to be changed back to fully discretionary or appoint a revocable interest to a different beneficiary. As all life interest trusts are now within the relevant property regime, ie subject to inheritance tax, the appointment or withdrawal of a revocable life interest is not a chargeable event for IHT. Contributed by Sue Moore

 156  Mandated income: clarification from HMRC
 

Trustees frequently have the income of life interest or interest in possession trusts paid directly to the beneficiary.

Where the income is mandated, the trustees can avoid completing the trust self assessment tax return (SA900). The return asks if the income is mandated to the beneficiary and whether all the remaining income not mandated has been taxed at source. If so, there is no need to complete the SA900 and the beneficiary can instead return the income directly on their personal tax return.

Following the changes to the taxation of dividends and interest, trust income is generally being paid gross and so the question has arisen as to what is meant by mandated income in connection with the completion, or not as the case may be, of the SA900.

In essence this is an administrative shortcut – the tax paid remains the same, but it saves time and costs for the trustees and for HMRC.

HMRC’s Trusts, Settlements and Estates Manual states at TSEM3763: “Sometimes the trustees mandate trust income to a beneficiary. If the trustees mandate income to a beneficiary, it means that the beneficiary receives it and the trustees do not. So in such a case there is no statutory basis (see TSEM3761) for taxing the trustees as being in receipt of the income. The beneficiary both receives the income and is entitled to it.”

The query has arisen now, as dividends and interest received as trust income will in the main be paid gross, and the trustees are primarily liable for the tax. If the income is mandated to the beneficiary the liability passes to the beneficiary as per TSEM3763, so in the event the beneficiary does not declare the income and pay the tax the liability cannot fall back to the trustees.

We asked HMRC to confirm for various scenarios what it treats as mandated income. In simple terms, provided the income goes to the beneficiary without passing through the hands of the trustees it will be mandated income.

The full response from HMRC is in TAXguide 13/17.

Contributed by Sue Moore

138 New trust register: update

HMRC is setting up a new online system for reporting new trusts in line with EU requirements under the Fourth Money Laundering Directive. The regulations giving details of the reporting requirements have now been approved and came into force with effect from 26 June 2017.

They are the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017, SI 2017/692. Regulation 45 gives details of the register of beneficial ownership with para 3 giving the following time frame for reporting:

(3) The information required under paragraph (2) must be provided on or before—

(a) 31st January 2018;
(b) 31st January after the tax year in which the trustees were first liable to pay any of the taxes referred to in paragraph (14) (“UK taxes”).

Paragraph 14 lists the following taxes:

(14) For the purposes of this regulation, a taxable relevant trust is a relevant trust in any year in which its trustees are liable to pay any of the following taxes in the United Kingdom in relation to assets or income of the trust—

(a) income tax;
(b) capital gains tax;
(c) inheritance tax;
(d) stamp duty land tax (within the meaning of section 42 of the Finance Act 2003(a));
(e) land and buildings transaction tax (within the meaning of section 1 of the Land and Buildings Transaction Tax (Scotland) Act 2013(b));
(f) stamp duty reserve tax. The form 41G (Trust), used to notify HMRC of new trusts, was withdrawn in April 2017 in anticipation of the new online system.

The online register was launched in mid-July by HMRC, it is not yet available for agents, just for trustees.

The first step for a trustee is to register for a Government Gateway account. There are then a series of screens to work through asking for various pieces of information in order to register a trust:

  1. Trust name, address, telephone number, if it is governed by laws of a country other than the UK, whether general administration is outside UK.
  2. Details of the lead trustee, name address, telephone number, date of birth, national insurance number.
  3. Similar details for up to four additional trustees.
  4. Details of settlor(s), name, date of birth, telephone number national insurance number.
  5. Details of beneficiaries whether they are a charity, another trust, a class of beneficiaries, individual beneficiaries or a company.
  6. For individual beneficiaries, up to 10, the name, date of birth and national insurance number need to be inserted.
  7. Whether or not there is a protector is asked and does anybody else have influence or involvement in the trust.
  8. The type of assets in the trust needs to be reported along with their monetary value.

Details of existing trusts will be migrated across and so will just need to be checked and missing details added when there is a tax event. The registration service for agents should be available in September. It is unsatisfactory that the 41G was withdrawn before the alternative becomes available and for the service to be available to trustees before agents, given that most trusts seem to have agents.

Contributed by Sue Moore

 138  Taxation of dividends and the tax pool
 

The new dividend taxation rules are very complex and could catch out practitioners where they relate to discretionary trusts and the tax pool. Discretionary trusts are liable to income tax at 38.1% for dividends and 45% for other income except for the income covered by the standard rate band and income used to pay the trust management expenses (TME) which is only liable at 7.5% if the income source is dividends and 20% if it is other income.

Every payment from a discretionary trust has to be franked by tax paid by the trustees. All tax paid by the trustees is added to the tax pool to frank distributions to beneficiaries. The tax on the standard rate band income is added to the tax pool; Finance Bill 2016 omitted to amend the tax pool rules to add the 7.5% tax actually paid on dividends to the tax pool and this was corrected before it became Finance Act 2016.

The standard rate band income has not been distributed/paid as expenses it is still in the accumulated income and so the tax is reflected in the tax pool. However, the tax paid on the income used to pay the TME is not added to the tax pool, the payment of the expenses has to in effect be franked and thus the tax is not available to the tax pool for distributions. The income has been spent so is not a part of the accumulated income. HMRC-approved software correctly calculates the tax pool by not adding in any of the tax paid on income used to pay TME.

Contributed by Sue Moore