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Key tax considerations for Trustees 

Richard Bull, Partner, Private Clients 
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It’s not just individuals who should consider their position as the tax year draws to a close, Trustees should also take time to review their situation and consider the future needs of beneficiaries

Discretionary distributions to beneficiaries

Distributions from discretionary trusts carry a repayable tax credit. 

 Act now: tax planning opportunities

  ►  Year-end tax planning opportunities for individuals
  ►  Tax planning for residential property owners
  ►  Profits for business owners and their families
  ►  Tax planning for resident and non-domiciled individuals
  ►  Radical changes to UK Inheritance Tax proposed
  ►  Concerns for the future of Entrepreneurs' Relief

This means that non taxpaying beneficiaries, particularly minors can often claim back significant amounts from HMRC.

For example, a payment of £5,500 to a beneficiary who has no other taxable income, would mean they could reclaim £4,500 from HMRC.

Payments can be made annually to use up beneficiaries’ tax-free personal allowances that would otherwise be lost. Making use of beneficiaries’ personal allowances can mean that all of the tax paid
by the Trustees is reclaimed in due course, so 100% of the income is effectively retained.

Trustees with minor beneficiaries should consider making payments ahead of 5 April if no other distributions have been made to ensure valuable allowances are not lost.

Capital Gains Tax planning

Just like individuals, Trustees can take advantage of a tax free annual exemption. They are however only entitled to half of the regular allowance, £6,000. In some circumstances, where multiple Trusts have been settled by the same person, the allowance is shared down to a minimum of £1,200.

One way of utilising the allowance is to sell and then buyback stocks and shares. This provides an opportunity to increase the base cost for future sales. The repurchase will need to be delayed for more than 30 days to benefit from this.

Assets with a loss can also be sold to reduce capital gains in the same tax year or they can be carried forward and set against future capital gains.

As Trustees pay Capital Gains Tax at a flat rate of 20% (28% on residential property), utilising the annual allowance each year can, in the long run, save £1,200 each year (assuming the allowance is not shared).

Ten year anniversaries

Many Trusts are liable to a special Inheritance Tax regime, commonly referred to as the relevant property regime.

A key feature for Trusts within these rules is that they face a tax charge on each ten year anniversary based on the date the Trust was originally created (or for Trusts created under a will/deed of family arrangement, the date of death).

Knowing when the next ten year anniversary falls means consideration can be given to any planning that may be needed beforehand.

Examples of planning consideration

  • Investing the Trust fund in certain assets that qualify for Inheritance Tax reliefs
  • Making capital distributions to beneficiaries prior to the anniversary, often with reduced tax charges
  • Ensuring that there is sufficient liquidity in the trust’s investments to pay any tax that may be due.

Distribution strategy

For Trustees making regular distributions for defined purposes, like annual school fees, savings can often be possible by making some changes to the way the trust operates. This is best illustrated with an example:

If we take a Trust paying out £40,000 from income towards school fees for four grandchildren each year.

By utilising the grandchildren’s tax free personal allowances (see above), each beneficiary will receive a repayment from the tax man of just under £7,000. Giving an effective receipt of £17,000 each.

However just over £5,000 of tax paid by the trustees is lost and cannot be reclaimed.

It is possible to change the beneficiaries’ entitlement under the trust and alter the way income is treated. This would mean that the tax that is lost can be reduced significantly, sometimes to nothing.

The saving is dependent upon the income the Trustees receive. If in the above example we assume that the Trustees are receiving dividends, then the tax that would be lost is reduced down to just under £1,300. Meaning each beneficiary receives an extra £925.

Across five years, the saving would be just under £18,500 (£4,625 per beneficiary).

A secondary perhaps more important benefit to altering the way the trust operates is it helps simplify the tax returns. Also instead of the trustees paying tax to HMRC for beneficiaries to then reclaim, the beneficiaries instead make small tax payments to HMRC each year. Helping with cashflow management.

This planning does change the structure of a trust so advice should be sought before taking action. If you are interested in knowing more about the above or would like more information on year-end tax planning issues for Trustees please contact your usual Crowe contact.

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Richard Bull
Richard Bull
Partner, Private Clients