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Trust taxation at a glance

This article provides a high-level summary of who is liable to tax when an asset is held in a trust.

Type of trust – Bare

Income tax*

Beneficiary taxable at own tax rates unless an unmarried** minor child of the settlor, in which case the settlor is liable where income exceeds £100 per annum.

Capital gains tax (CGT)

Beneficiary taxable at 10% or 20% and full annual exempt amount available.

Inheritance tax (IHT)#

A gift## into trust is a potentially exempt transfer (PET). Assets are treated as inside the beneficiary’s estate for IHT purposes.

Type of trust – Interest in Possession

Income tax*

Trustees taxable at either 7.5% (dividend) or 20% (interest) depending on the nature of the income. Beneficiaries are entitled to reclaim tax where they suffer a lower rate. Higher rate and additional rate taxpaying beneficiaries will have further tax to pay.

Capital gains tax (CGT)

Trustees taxable at 20% on trust disposals above the annual exempt amount.

Trusts annual exempt amount is split between number of trusts (excluding bare trusts) established by settlor to minimum of £1,110 per trust for 2016/17.

Inheritance tax (IHT)#

A gift## into trust is a chargeable lifetime transfer (CLT). Periodic and exit charges will also apply to the trustees. Settlement will generally benefit from its own full nil-rate band (NRB) at 10-year point.

Tax is payable at entry at one half of the death rates, 20%. Where the settlor pays tax, the gift is grossed up resulting in a tax rate of 25%. Tax is due on the element of the gift which is above the settlor’s available nil-rate band.

Type of trust – Discretionary

Income tax*

The trustees are liable to any income tax arising. The trust has basic rate band of £1,000 within which tax is payable at 7.5% or 20%. (£1,000 split between number of trusts (except bare trusts) established by settlor to a minimum of £200.)

Above this band income is taxable at 45% or 38.1% depending on source (tax deducted at source can be offset). Where dividend income is distributed to beneficiaries this will be classed as trust income, not dividend income and cannot be offset against any available dividend allowance they have.

Capital gains tax (CGT)

Trustees taxable at 20% on disposals.

Trusts annual exempt amount is split between number of trusts (excluding bare trusts) established by settlor to minimum of £1,110 per trust for 2016/17.

Inheritance tax (IHT)#

A gift## into trust is a CLT. Periodic and exit charges will also apply to the trustee. Settlement will generally benefit from its own full NRB at 10-year point.

Tax is payable at entry at one half of the death rates, 20%. Where the settlor pays tax, the gift is grossed up resulting in a tax rate of 25%. Tax is due on the element of the gift which is above the settlor’s available nil-rate band.

* Realised gains from life policies are taxed as income. They have special rules. Principally, where the settlor is alive, any chargeable event will be assessed on the settlor except under a bare trust where the beneficiary will be assessed, unless the trust is a parental settlement. There is no reclaim facility for the settlor or beneficiaries for any life fund taxation suffered.
** And not in a Civil Partnership (as defined by the Civil Partnership Act 2004).
# To the extent that they are not otherwise exempt.
## Unless exempt.

This article is based on Old Mutual Wealth’s interpretation of the law and HM Revenue & Customs practice as at April 2015. We believe this interpretation is correct, but cannot guarantee it. Tax relief and the tax treatment of investment funds may change.

Old Mutual Wealth accepts no responsibility for any action taken or refrained from being taken due to this or any related document.

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