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Understanding Trust Tax

There are various complexities that trustees need to consider when adhering to the various trust tax compliance obligations.

The way in which a trust is taxed varies between the different types of trust.

The most common types of trust are:

01 Discretionary Trusts

These are the most flexible type. Trustees have an obligation to submit an annual tax return to HMRC where certain conditions are met. It is also advisable to maintain annual accounts for the trust. In addition, inheritance tax returns are required at each 10 year anniversary and when assets are distributed to beneficiaries where certain conditions are met.

02 Life Interest/Interest in Possession Trusts 

Beneficiaries are entitled to use the trust property and receive all income generated during their lifetime, thereafter the assets transfer to another beneficiary. Trustees usually have an obligation to submit an annual tax return to HMRC however where certain conditions are met (i.e. all income is mandated directly from the source to the beneficiary or a property is occupied by the life tenant and no income is received) a return may not be required.

It is also advisable to maintain annual accounts for the trust. Where assets are transferred into the trust on or after 22 March 2006, a 10-year anniversary inheritance tax return may also be due.

03 Bare Trusts 

These are the simplest type. The trustee holds the property as legal owner on behalf of the beneficiary under a nominee arrangement and the trustee must act in accordance with the beneficiary’s wishes. The income from the property belongs to the beneficiary and is declared on their personal tax return, there are therefore no reporting requirements for the trustees.

In addition to completing ongoing tax compliance work, our team is able to offer a one-off compliance review of your trust. This would include a review of the Trust Deed and any subsequent Deed of Appointment to ensure that the trust is being taxed using the correct rules together with a review of the inheritance tax reporting.

The team is also able to advise on tax planning opportunities available in order to minimise tax, both in respect of existing trusts and potential new trusts.

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