This Practice Note sets out the special income tax and capital gains tax (CGT) treatment of trusts for disabled persons. For guidance on how to make a vulnerable person election for the purposes of income tax and CGT, see Practice Note: Taxation of trusts for disabled persons—vulnerable person election. Reform There were some important changes to the definition of a disabled person following HMRC's consultation in 2013. Firstly, the qualifying criteria have been extended to include people who are in receipt of Personal Independence Payments for care or mobility at either rate and to include people who receive the higher rate of Disability Living Allowance mobility component. Secondly, the anomaly which allowed a CGT free uplift on the death of the disabled person on interest in possession trusts but did not extend the same uplift to discretionary type trusts has been rectified. Both benefit from the uplift. Rules across the tax system have been harmonised. Trustees of trusts established after

For general guidance on the special income tax and capital gains tax (CGT) treatment of trusts for disabled persons, see Practice Note: Taxation of trusts for disabled persons—income tax and CGT. This Practice Note explains how an election for such special income tax and CGT treatment may be made. Reform There have been some important changes to the definition of a disabled person following HMRC's consultations. Firstly, the qualifying criteria have been extended to include people who are in receipt of Personal Independence Payments for care or mobility at either rate and to include people who receive the higher rate of Disability Living Allowance mobility component. Secondly, the anomaly which allowed a CGT free uplift on the death of the disabled person on interest in possession trusts but did not extend the same uplift to discretionary type trusts has been rectified. Both types of trust for disabled persons now benefit from the uplift. Although it does not amount to reform as such, the third

Capital gains tax (CGT) rules have historically provided generous relief for business owners who dispose of their business. Until 2008 relief was provided by way of business asset taper relief and, before that, retirement relief. When business asset taper relief was abolished in 2008, entrepreneurs' relief was introduced to preserve the lower effective rate of CGT on business assets enjoyed by business owners under the taper relief regime. With effect from 6 April 2020, entrepreneurs’ relief was renamed to business asset disposal relief (BADR). Broadly speaking, BADR is a relief that reduces the rate of CGT payable by business owners on a disposal of their business. Trustees are able to claim BADR on the disposal of business assets held by them in the same manner that individuals can, subject to the necessary conditions being satisfied. For more information on the availability of BADR on a disposal by individuals and the conditions for BADR generally (including the changes brought in by Finance Act 2016 and Finance Act 2019 (FA

The purpose of this Practice Note is to set out an overview of the key capital gains tax (CGT) reliefs and exemptions applicable to business assets which are available to trustees (as well as individual business owners). This Practice Note examines: • CGT reliefs for trustees carrying on a business, namely: ◦ business asset roll-over relief ◦ incorporation relief • CGT reliefs and incentives for trustees as investors, namely: ◦ enterprise investment scheme (EIS) and seed enterprise investment scheme (SEIS) ◦ relief on company reorganisations ◦ relief for losses on loans to traders EIS and SEIS are an important means of attracting investment into a business. However, this Practice Note focuses on the tax aspects of both schemes as they apply to trustees as investors, ie the EIS income tax and CGT advantages available to an investor. The reliefs not covered in this Practice Note but for which there are separate Practice Notes are: • CGT business asset disposal relief (see Practice Notes: CGT—business asset disposal

Capital losses arising to trustees are calculated in the same way as they are for individuals (for further guidance on capital losses for individuals, see Practice Note: CGT—utilising capital losses). Capital losses are set against any gains of the same year of assessment in the most beneficial way; any that are unused can be carried forward and set against gains arising in subsequent years. They cannot be carried back and set against gains of a previous year. Losses brought forward need only be set against gains of subsequent years to the extent required to reduce the gains of that year to the amount of the applicable annual exemption. In this way none of the annual exemption is wasted. Losses must be claimed in order to be allowable, normally on the Capital Gains supplementary pages of the Trust and Estate Tax Return. The general time limit for claims and reliefs is four years from the end of the year of assessment to which they relate. It is advisable to include details of capital losses on

This Practice Note highlights some features of the taxation of investment income which apply specifically to both discretionary and interest in possession trusts. Interest Since 6 April 2016, interest is generally paid without deduction of tax. Trustees are not entitled to the savings allowance introduced by section 4 of the Finance Act 2016 whereby individuals may receive up to £1,000 of gross interest to be charged at a nil rate. Consequently, with the abolition of tax deduction at source, trustees will be required to file a tax return to pay a tax liability on very small amounts of interest received. HMRC has recognised that the new regime will impose an additional administrative and financial burden on trustees. As a temporary measure, initially for 2016–2017 only, HMRC announced that trustees need not declare and pay tax on interest where the only source of income is savings interest and the tax liability is less than £100. These arrangements were extended to subsequent tax years and remained in force until the 2023–24 tax year. From tax year 2024–25 most trusts

This Practice Note considers how payments of income tax or capital gains tax (CGT) should be made by trustees once it has been established that the trustees are liable for those amounts. Tax is collected in a number of ways. These are: • collection at source throughout the year • payments on account of income tax calculated by reference to the tax due for the previous tax year • balancing payments for the tax year (tax liability less tax already deducted at source or paid on account) For guidance on what income tax is payable by trustees, see Practice Notes: Interest in possession trusts—income tax and Discretionary trusts—income tax. For guidance on what CGT is payable by trustees, see Practice Note: CGT—basic principles for trusts. Income tax—payments on account Payments on account of income tax will be required when the trustees' tax liability is not substantially covered by tax deducted at source. This situation will arise when the trust receives untaxed income such as gross interest or rental

This Practice Note is now being maintained internally. Reasons for restructuring a trust Restructuring a trust may be undertaken for a number of purposes, including to: • create an interest in possession for one or more beneficiaries • restrict the class of beneficiaries • create specific trusts for specific beneficiaries or for a class of beneficiaries • create a sub-fund or sub-funds • appoint a different set of trustees over a part of the trust fund • expand the administrative powers held by the trustees A trust may be restructured by one or more of the following methods: • an exercise of a statutory power or of an express power contained in the trust deed or instrument • an application to court for a variation of the terms of the trust • a disposition or disclaimer by a beneficiary of a vested or contingent interest Exercise of a power This is likely to be the simplest and most effective method of restructuring the trust because it can be achieved (if the terms

The rules relating to settlor interested trusts are anti-avoidance rules, aimed at ensuring that a settlor cannot avoid tax on assets of which they are not fully divested. This Practice Note focuses principally on the income tax treatment of settlor interested trusts, although the capital gains tax (CGT) and inheritance tax (IHT) consequences are also outlined. For an at-a-glance summary of the tax treatment of settlor interested trusts, see the table in Practice Note: Taxation of trusts—summary of tax treatment of settlor interested trusts. Income tax—settlor interested trusts The general rule relating to income that may be treated as the settlor’s own income is contained in section 624 of Income Tax (Trading and Other Income) Act 2005 (ITTOIA 2005), which is part of what HMRC refers to as the ‘settlements legislation’ (and is also known as the ‘settlements code’ or ‘settlor code’). The general rule is subject to certain exceptions (see ‘Exceptions to the general rule’ below). While the general rule is often applied in the context of settlor interested trusts, the legislation is widely

A ‘sub-fund’ of a trust is said to exist when a specific asset (or specific assets) of the trust are held subject to separate and distinct trust provisions to those applicable to the other assets of the trust. A trust may have any number of sub-funds. Normally, the same persons are trustees of all the trust property, but it is possible for separate trustees to be appointed for one or more of the sub-funds. For example, suppose the trustees of a discretionary trust use part of the trust fund to acquire a property for occupation by one of the beneficiaries. The trustees exercise their overriding powers under the trust to give the beneficiary an interest in possession in the property, and a right to occupy it during their life, for so long as they wish to do so. On the termination of this interest, the original trust provisions will apply to the property, ie it will be held subject to the original discretionary trusts. The trust of the property can be referred to as a ‘sub-fund’ of the

The tables below provide a very brief summary of some of the main provisions relating to the income tax, capital gains tax and inheritance tax treatment of settlor interested trusts. For more detail on the rules applying to settlor interested trusts, see Practice Note: Taxation of trusts—settlor interested trusts. The table has been split into three below to show the income tax, capital gains tax and inheritance tax treatment in separate tables. To view a summary of all of the taxes side-by-side (for easy comparison), see the attached excel spreadsheet. The provisions which affect offshore trusts have been included in the table for reference only and provide only a high-level summary of the main rules. For detailed guidance on these provisions, see Practice Notes: Offshore trusts—attribution of income to settlors and Offshore trusts—attribution of gains to settlors. All references in the tables below to spouse are to be read to include civil partner and references to marriage are to be read to include civil partnerships. Income tax

This Practice Note explains what unauthorised unit trusts (UUTs) are and how they are taxed. It looks at the two key types of UUTs—namely exempt UUTs (EUUTs) and non-exempt UUTs (NEUUTs)—and describes the tax treatment of these types of funds and their investors. What are unauthorised unit trust (UUTs)? Unit trusts, as a vehicle-type, are chiefly used as investment vehicles. An ‘unauthorised’ unit trust (UUT) is a unit trust that has not been authorised by the Financial Conduct Authority under the Financial Services and Markets Act 2000 (FSMA 2000). Unit trusts are constituted by trustees holding assets on trust for unitholders. The trustees hold the legal title to the fund's assets but are legally obliged to apply those assets for the benefit of the unitholders. A fund manager will provide investment advice to the trustees. Investment in a unit trust can only be promoted to the UK general public (retail investors) if the unit trust has been authorised under FSMA 2000. However, in order to obtain authorisation under FSMA 2000 a unit trust must comply with