Tax and trusts

Trusts may be subject to the payment of tax. Trustees are responsible for paying any tax due on the income or profits generated by the trust. If the settlor dies within seven years of making a transfer into the trust and their estate is worth more than £325,000, they may have to pay inheritance tax (currently at 40%). If however the value of their estate is less than £325,000, no tax may be payable. 

Income tax

UK income tax runs from 6 April to the following 5 April of the next year. Income tax is calculated on the basis of income received by the trust through trust activities, such as; savings and investment income, trading income, or property income. However, taxable income is subject to deducting allowable expenses from the overall income incurred.

Capital Gains tax (CGT)

A trust may have to pay CGT if trust property (land) is sold, given away or disposed of and has gone up in value since it was placed into the trust. However, taxes are only payable where the property value has increased above an allowance known as the Annual Exempt Amount. This amount allows the trust to make some capital gains without incurring tax. There are also other allowable expenses which may be claimed and offset against CGT. 

Inheritance tax 

When a trust is created, inheritance tax may be payable where an estate (property and assets owned by an individual) are valued at more than £325,000. This is worked out on the basis of the assets and property transferred into the trust, together with any chargeable gifts made in the previous seven years by the settlor. If this figure is below £325,000 then no tax may be payable. 

Taxes may also be payable during the lifetime of the trust itself. For instance with discretionary trusts, tax may be payable when the trust reaches it’s ten-year anniversary, when assets are taken out of the trust or the trust ceases. 

The HMRC gives guidance where the settlor places their house into a trust, they still continue to reside there and the value of their individual estate is more than £325,000. The HMRC says, “You can give your home to your children - or someone else - at any time, even while you're still living in it. However, if your estate (including your home) is worth more than the Inheritance Tax threshold (£325,000), there may be tax implications. You can continue to live in your home as your primary residence after giving it away, provided you pay a market rent to the new owner. Bear in mind that the new owner may have to pay Income Tax on the rent you pay them. If you don't pay a market rent, the gift will be considered a 'gift with reservation of benefit' and the house may be subject to Inheritance Tax.” IHT in these circumstances would be calculated based upon; the type of trust, if the settlor had lived for more than seven years after placing the asset into a trust, any declarations made as to how the asset was to be treated for IHT purposes.