Trusts and Tax
A trust is a legal mechanism that allows assets such as money or property to be held on behalf of someone else. In other words, the legal and beneficial ownership of an asset is split between different people. This means that though an asset might be legally held in the name of one person (known as a trustee), that person is holding it for the benefit of someone else (known as the beneficiary).
Assets are often held in this way in order to look after them for children or other beneficiaries who aren’t able to manage them themselves. Trusts can also be used to hold assets for charitable purposes, or as part of a tax succession plan.
There are various types of trusts, all with different benefits, rules and tax implications. The type of trust that’s right for you will depend on the purpose of the trust and the circumstances around it. As specialist solicitors will be able to advise you on this, as well as ensure you are fully aware of all your legal responsibilities going forward.
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- Types of Trusts
- Trust Registration with HMRC
- Trust Accounts and Tax Returns
- Inheritance Tax Advice
- Estate Planning
- Planning for Care Home Fees
Types of Trusts
Some common types of trust include:
Bare trusts: this is the simplest type of trust. In a bare trust, the beneficiaries have a clear and unrestricted right to the assets held in it. The trustee does not have any right to make decisions about the assets themselves and must follow any reasonable instructions given to them by the beneficiaries. The only exception to this is if the bare trust is being held on behalf of beneficiaries who are under the age of 18.
Life interest trusts: this type of trust is often set up in a Will. It gives the beneficiary the right to receive income from an asset and/or to use and enjoy the asset during their lifetime. The most common example of this is when a house is left to a beneficiary in a life interest trust. The beneficiary would have the right to live in the house (or collect a rental income from it) for the duration of their life, but they would not be able to sell the house or leave it to the person of their choice in their own Will. The beneficiaries in this type of trust are usually known as life tenants. Life interest trusts can also be called interest in possession trusts.
Discretionary trusts: This is a type of flexible trust where the beneficiaries do not automatically have the right to receive the assets in the trust. In a discretionary trust, the trustees have the power to decide which beneficiaries should receive the money or property in the trust, and when. For example, discretionary trusts are sometimes used to hold money to support a vulnerable person. The vulnerable person wouldn’t be able to access money held in the trust whenever they wished, but the trustees would have the ability to release money to the vulnerable person as and when they saw fit.
These types of trust, and the many other types of trust available, all have their own rules about taxation and inheritance tax regimes. As experienced, knowledgeable solicitors we will be able to advise you on any tax implications of setting up and running a trust.
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Trust Registration with HMRC
All express trusts now need to be registered with HMRC. There are a few exceptions to this, but this is different to previous rules when only trusts that were liable for certain types of tax needed to be registered.
An express trust is a trust that has been explicitly created in writing. It can be set up in a Will or in someone’s lifetime. Not all trusts are created this way, some are made as the result of a court ruling or arise due to legislation. Trusts that have not been expressly created do not need to be registered.
What are the exceptions?
There are a limited number of reasons why an express trust might not need to be registered. Some of these are listed below, though this is not an exhaustive list:
• Trusts created in a Will that only receive assets from the estate and are wound up within two years of the settler’s death.
• Statutory trusts that are created as a result of following intestacy laws in the event of someone dying without a valid Will.
• Co-ownership trusts where the same people are both the trustees and the beneficiaries.
• Pilot trusts that hold less than £100 and were set up before 6 October 2020. (All pilot trusts established after this date are required to register even if they hold less than £100 of assets.)
• Trusts created to set up a bank account for minors or vulnerable persons.
• Certain express trusts that have been established to meet legislative conditions, for example a trust for a disabled person, a trust for bereaved minors, an 18-25 trust or a personal injury trust.
If you think your trust may fall into one of these exceptions, you will need to seek legal advice to confirm this.
Deadlines for registering trusts
There are strict deadlines for when a trust needs to be registered by.
The exact deadline will depend on the type of trust and when it was created, but the deadline will usually be some time in the tax year following the one in which the trust became liable for registration. However, in some cases the deadline could be as little as 90 days after the trust became liable, so it’s important to seek advice on this as early as possible.
Our experienced solicitors can advise on whether or not a trust needs to be registered and can even manage the process on your behalf.
Trust Accounts and Tax Returns
Trustee(s) are responsible for keeping trust accounts and ensuring that any liable tax is paid. If there is more than one trustee, someone will usually be nominated as the ‘principal acting trustee’ to act as the main contact for managing tax matters, though the other trustees will still be accountable.
If you have been tasked to act as a trustee, you will have a duty to:
• Produce an annual statement of the trust’s income, outgoings and any tax paid for trust beneficiaries. (This will need to be personalised for each beneficiary).
• Complete and submit a self-assessment on behalf of the trust at the end of each tax year.
• Pay any tax bill by the deadline given.
• Inform HMRC about any change in circumstances of the trust.
• Always act with due care and skill, and in the best interests of the trust and its beneficiaries.
There is a great deal of responsibility involved in the role of trustee, especially when it comes to keeping accurate accounts and submitting tax returns. In the event of any breaches, trustees can be held personally responsible and may have to pay compensation to the trust or individual beneficiaries.
Many trustees choose to appoint an experienced professional such as a solicitor to handle these tasks on their behalf and ensure all legal responsibilities are being met. Roche Legal can offer support with managing trust accounts and tax returns, whether or not we were involved in the setting up of the trust.
Inheritance Tax Advice
Inheritance tax is a tax payable on assets after a death. This includes assets that were held in the sole name of the person who has died, assets that had been given away as gifts in the seven years before the death (or a percentage of them) and their share of any assets that were held jointly.
The personal representatives of an estate will need to arrange for any inheritance tax that is due to be paid as part of the process of administering the estate. The first payments ideally need to be made by the end of the sixth month after the person has died because HMRC charge interest on tax paid later than six months. Often, assets such as property or shares will need to be sold to cover the balance of inheritance tax. For inheritance tax due on assets such as property and shares, tax can be paid in equal annual instalments of up to 10 years.
Not all estates will owe inheritance tax. This could include estates where:
• The assets belonging to an estate total less than the nil rate band (currently £325,000).
• The person who has died left their estate to a surviving spouse or civil partner (in these cases, no inheritance tax will be due until the death of the surviving spouse/civil partner).
• The person who has died left their family home to their children or grandchildren (in these cases the estate will benefit from an additional residence nil rate band, which could increase the non-taxable amount of the estate by between £100,000 and £175,000).
• Assets have been left to UK charities in a Will (in these cases the value of these assets will not count towards the threshold for inheritance tax).
• The person who has died was domiciled outside of the UK (in these cases only their UK assets will be subject to inheritance tax, not assets that were held elsewhere).
Working out what inheritance tax is due and how to pay it can be complicated, especially in the time after a bereavement. Our knowledgeable solicitors can help you assess the situation and make a plan. We can also handle the formal process of submitting inheritance tax forms on your behalf, whether you’re dealing with an entire estate or a trust.
When making plans for the future of your estate, it’s natural to want to explore ways of minimising the tax liability you will be leaving behind. Working with an expert can enable you to arrange your estate in a way that will make things as straight-forward as possible for your loved ones to deal with when the time comes.
Our experienced solicitors are always available to support you with this. They will be able to explain all the options available, including the possibilities of trusts, charitable donations, gifts and life interest trusts.
In addition to considering the full inheritance tax liability for your estate, we’ll also be able to assist you with ensuring your affairs are all in order and fully documented.
Planning for Care Home Fees
More and more people are requiring care later in life. Whether this is in the form of home help, a care home or a nursing home, there’s no avoiding the fact that paying for this care can be very expensive.
Though some people are eligible to have their care paid for by the NHS (if they have certain medical conditions) or by their local council (if their net worth is below a certain threshold) many more find themselves responsible for paying for the bulk of their care themselves.
This can be a real worry, which is why you may wish to start planning for these eventualities in advance. Whether you wish to get advice about setting aside money for fees, or whether you wish to explore your options for protecting your assets or avoiding the sale of your family home, our empathetic, experienced solicitors are here to help.
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