Taxation of Trusts
There are a number of different sorts of trusts, but usually they fall into one of the following categories:
Bare Trusts
Bare trusts are treated for tax purposes as if the beneficiary holds the trust property in his or her own name. Income tax and capital gains tax are charged on the beneficiary, as if the trust did not exist, except where parents declare trusts for their minor children.
Interest in Possession Trusts
One or more beneficiaries has a right to all or part of the income of the trust, perhaps with capital passing to other beneficiaries when the interest in possession terminates, (commonly on a death).
The trustees are chargeable to income tax and capital gains tax as follows:
Rent and trading income are chargeable at the basic rate.
UK dividend income is chargeable at the starting rate for dividends and the tax credit attached to the net dividend meets the trustees' liability.
Savings income, such as bank interest, is chargeable on the trustees at the lower rate. Such income usually has tax deducted at source by the bank or building society.
Income to which beneficiaries are entitled is taxed on those beneficiaries with credit given for the tax suffered by the trustees.
Discretionary Trusts
The beneficiaries of a discretionary trust have no right to receive income and it is up to the trustees whether or not distributions are made.
The trustees are liable to tax on income and gains at the rate applicable to trusts, but dividends and other similar income are chargeable at the trust rate that applies to dividends.
Beneficiaries are only taxed to the extent that income is paid out to them.
Accumulation and Maintenance Trusts
Such a trust allows income to be accumulated, frequently during childrens' minority, with interests in posession arising thereafter. They will therefore tend to be taxed as discretionary trusts to begin with but will convert to interest in possession trusts at a later date.
Mixed Trusts
For both trustees and beneficiaries, in a mixed trust the income for each part of the trust will be taxed under the rules for that type of trust. For example, the part of the trust in which there is an interest in possession will be taxed as such, while the discretionary part will be taxed as a discretionary trust.
Contact Higgisons for advice on setting up trusts.