How do Trusts work?

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It’s important to understand the most popular types of trust and how they work to protect assets, reduce taxes and manage tax affairs. Here are the top 7 types of trust:

  1. Bare Trusts: These trusts are simple and straightforward. The beneficiary receives the assets of the trust upon reaching legal age or at the discretion of the trustee. The income and gains from the trust are taxable income for the beneficiary.
  2. Interest in Possession Trusts (IIP): The beneficiary has the right to the income generated by the assets of the trust for a set period or for the rest of their life. The trust assets will be passed on to others after the beneficiary’s death.
  3. Discretionary Trusts: The trustee has control over when and how the income or assets of the trust are distributed among the beneficiaries. This provides flexibility if there are uncertain future circumstances or if the beneficiaries are not yet clear.
  4. Accumulation Trusts: Income earned by the trust is reinvested into the trust, rather than distributed to the beneficiaries immediately. This is useful if the trust is designed to support future beneficiaries, such as grandchildren who are still young.
  5. Mixed Trusts: These trusts combine elements of different trust types, suitable for complex estate planning or asset protection.
  6. Settlor-interested Trusts: These trusts come into play if the beneficiary is also the settlor (or creator) of the trust. The tax consequences are different and careful advice is required.
  7. Non-resident Trusts: If the trust is not based in the UK, it won’t be subject to UK inheritance tax regulations, but may be liable to tax in other jurisdictions. This can cause complications for UK residents who set up trusts overseas.

Trust law uses many specific terms which must be understood when dealing with trusts. Some common examples are:

  • Settlor: the person who creates the trust by transferring assets to it.
  • Trustee: the person who holds the property on trust for the benefit of the beneficiaries.
  • Beneficiary: the person who is entitled to use or enjoy the income or assets of the trust.

Trust Taxation

Trustees are responsible for paying tax on income received by accumulation or discretionary trusts. The first £1,000 is taxed at the standard rate.

If the settlor has more than one trust, this £1,000 is divided by the number of trusts they have. However, if the settlor has set up 5 or more trusts, the standard rate band for each trust is £200.

The tax rates are below.

Trust income up to £1,000

Type of incomeTax rate
Dividend-type income8.75%
All other income20%

Trust income over £1,000

Type of incomeTax rate
Dividend-type income39.35%
All other income45%

Dividends

Trustees do not qualify for the dividend allowance. This means trustees pay tax on all dividends depending on the tax band they fall within.

Interest in possession trusts

The trustees are responsible for paying Income Tax at the rates below.

Type of incomeIncome Tax rate
Dividend-type income8.75%
All other income20%

Sometimes the trustees ‘mandate’ income to the beneficiary. This means it goes to them directly instead of being passed through the trustees.

If this happens, the beneficiary needs to include this on their Self Assessment tax return and pay tax on it.

There are changes to the tax of trusts coming in 2024 HMRC Trusts and Estates Newsletter: April 2023 – GOV.UK (www.gov.uk)

Capital Gains Tax

For the 2023 to 2024 tax year, the tax-free allowance for trusts is:

10 Year Charge

There are other charges that can be applied to trusts including the 10 year charge Trusts and Inheritance Tax – GOV.UK (www.gov.uk)

Our Expert

We have our own expert – Claire Forth ACMA CTA – if you need help with Trusts please get in touch

We recommend Bonallack & Bishop Solicitors for the legal work.

steve@bicknells.net

Charity News Update

Download a free copy from our website we have 9 pages of guidance covering

  • The Cost of Living Crisis
  • Charity Law Reform
  • Annual Return Changes
  • Use of Social Media
  • The risk from Cyber Crime
  • Accountancy and Tax update
  • Fundraising update
  • VAT update

Plus lots of other great advice for Charities.

steve@bicknells.net

How and when do you report capital gains tax on residential property disposals?

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As a property owner in the UK, it is important to understand the capital gains tax (CGT) rules and regulations. CGT is a tax on the profit made when you sell or dispose of an asset, such as a property. In this blog, we will cover the 60-day reporting rule, how to calculate capital gains, how to report capital gains, how to get a reference, and how to appoint an agent.

The 60-day reporting rule

From 27 October 2021 (before that it was 30 days from 6 April 2020) the reporting deadline was re-set at 60 days and requires UK residents to report and pay CGT on the sale of a residential property within 60 days of completion. Failure to report within this timeframe can result in penalties and interest charges. Non-UK residents are also required to report and pay CGT within 60 days of completion, unlike UK residents they need to report under the CGT rules even if they made a loss or had no tax to pay.

Companies are not required to report under the 60 day rules.

The rules apply to:

  • Individuals
  • Trusts
  • Personal Representatives
  • Partnerships
  • LLPs
  • Joint Property Owners
  • Non UK Residents

Calculating capital gains

To calculate your capital gains, you need to subtract the cost of the property from the sale price. The cost of the property includes the purchase price, any fees or expenses incurred during the purchase, and any improvements made to the property. You can also deduct certain expenses, such as estate agent fees and legal fees, from the sale price. Once you have calculated your capital gains, you need to work out how much tax you owe. The amount of tax you pay depends on your income and the amount of capital gains you have made. The current CGT rates for residential property are 18% for basic rate taxpayers and 28% for higher rate taxpayers.

There is an annual exempt amount for individuals

  • 2022/23 £12,300
  • 2023/24 £6,000
  • 2024/25 £3,000

For Trusts the amounts above are halved

If the UK Resident lived in the property they could qualify for Private Residence Relief HS283 Private Residence Relief (2023) – GOV.UK (www.gov.uk)

If there is no gain then UK Residents don’t need to report under the 60 day rules. Non UK Residents need to report even if its a loss.

Reporting capital gains

UK Residents need to use Report and pay your Capital Gains Tax: If you sold a property in the UK on or after 6 April 2020 – GOV.UK (www.gov.uk)

Even if they want an Agent to report for them they at least need to start the process and get an X reference to pass to their Agent/Accountant. The Agent can use the X reference in the Agent Gateway to generate a link for the client to accept to appoint them as Agent.

You only need one X reference/Property Account even if you have multiple property disposals.

The gain also need to be reported on the their Self Assessment Return showing the tax already paid.

Non UK Residents need to use HMRC: Structured Email (tax.service.gov.uk)

Problem Areas

Personal Representatives – Trusts can’t create accounts – the executors register and tick to report for someone else

Estimates – if the estimates are unreasonably low, HMRC will put in their own figures and charge interest

Overpayments – need to go back and change the figures

steve@bicknells.net

What is a Non Dom?

city view at london

Non-Dom status is a term used to describe individuals who are not domiciled in the United Kingdom for tax purposes. This means that they are not considered to be permanent residents of the UK and are therefore not subject to UK tax on their foreign income and gains, unless they choose to be.

The UK residency status test is used to determine an individual’s residency status for tax purposes. The test takes into account a number of factors, including the number of days spent in the UK, the individual’s ties to the UK, and their intentions for the future. If an individual spends more than 183 days in the UK in a tax year, or has significant ties to the UK, they will be considered a UK resident for tax purposes.

You might find this blog helpful Where should you pay tax? (Statutory Residence Test) – Steve J Bicknell Tel 01202 025252

If an individual is a Non-Dom and chooses to be taxed on the remittance basis, they will only be taxed on their UK income and gains, as well as any foreign income and gains that they bring into the UK. This means that they can avoid paying tax on their foreign income and gains that are kept outside of the UK.

However, there is a 7-year charge for Non-Doms who have been resident in the UK for 7 out of the previous 9 tax years. This charge is designed to discourage individuals from using Non-Dom status as a way to avoid paying UK tax on their foreign income and gains. The charge is currently set at £30,000 per year, but may be higher for individuals who have been resident in the UK for longer periods of time.

In conclusion, Non-Dom status can be a useful tool for individuals who have significant foreign income and gains, but it is important to understand the UK residency status test and the potential tax implications of choosing to be taxed on the remittance basis. The 7-year charge for Non-Doms is also an important consideration for those who are considering using Non-Dom status as a way to avoid paying UK tax. It is always advisable to seek professional advice before making any decisions regarding tax planning.

steve@bicknells.net