View the related Tax Guidance about Settlor
Employee trusts ― implications of disguised remuneration and where are we now?
Employee trusts ― implications of disguised remuneration and where are we now?Employee benefit trusts (EBTs) are commonly used to support employees’ share schemes and to provide other benefits to employees in the form of pensions and bonuses.Their use has been significantly affected by the introduction of the disguised remuneration rules. For further information, please see the Disguised remuneration ― overview guidance note. Although the statutory exclusions from those rules cover many of the share scheme-related activities of EBTs, some of their historic uses, such as providing loans to employees or opportunities for wealth creation through long-term investment schemes, have been substantially curtailed.However, the use of EBTs as a vehicle for employee ownership had a welcome boost following the Nuttall report. As a result, new tax advantages were introduced in Finance Act 2014 for employee owners who dispose of their interests in companies to employee ownership trusts (EOTs). The employment tax effects are covered in the Exemption from tax for bonuses paid by qualifying companies guidance note.Why do companies establish EBTs?An EBT is usually established by a company which provides it with assets in the form of cash or shares for the benefit of its employees. The operation of the EBT is governed by the trust deed which lays down the obligations of the sponsoring company, and the powers and duties of the trustees. The trustees
Heritage property strategies
Heritage property strategiesWhere an owner has claimed, or is considering claiming conditional exemption on heritage property, he may also wish to consider whether or not to establish a heritage maintenance fund; the income and capital of which may be used to support the conditionally exempt heritage property.If, on the other hand, he decides that he or his descendants can no longer maintain the heritage property, he may consider disposing of the property by gift or sale to a charity or a body listed in IHTA 1984, Sch 3 or, alternately, to HMRC in lieu of tax.Maintenance fundsAs part of the policy to preserve national heritage property, heritage maintenance funds may be established. These settled funds, whose assets (usually not heritage property itself) and income are used for the maintenance of heritage property, receive advantageous IHT treatment. Transfers of property into a maintenance fund are exempt transfers provided the maintenance fund meets the qualifying conditions set out below. The property does not rank as relevant property for the purposes of the principal and exit charges under IHTA 1984, ss 64–65. Although a recapture charge will apply when the trust fund loses its qualifying status, it can be avoided provided that the property reverts to the settlor or is used for alternative heritage purposes. Qualifying conditions for a maintenance fundThe requirements of the use of capital and income in the maintenance fund are as follows:•in the first six years after establishing the trust, the fund must only be used for:
Disabled and vulnerable beneficiary trusts ― uniform definitions
Disabled and vulnerable beneficiary trusts ― uniform definitionsIntroductionIt has long been recognised that special concessions are appropriate where property is held in trust for the benefit of a person who is unable to manage his financial affairs. Broadly, these concessions aim to treat the trust property as if it was owned outright by the individual, instead of applying special trust tax rules to it.Concessions have been introduced piecemeal with the result that the qualifying definitions and conditions were not consistent and at times contradictory.The Finance Act 2013 (and, for Scotland, the Social Security (Scotland) Act 2018) introduced amendments across the board to the tax legislation dealing with trusts for disabled persons and other vulnerable beneficiaries.In summary, the amendments:•updated the definition of a disabled person and applied it to all the relevant provisions•harmonised the qualifying conditions for all such trustsSpecial trust provisions for disabled persons and vulnerable beneficiariesThe provisions which are affected by these definitions are:Inheritance tax•trusts for bereaved minors ― see the Trusts for bereaved minors guidance note•age 18–25 trusts ― see the Age 18–25 trusts guidance note•the four types of disabled person’s trust ― see the Disabled person’s interest guidance noteCapital gains tax•hold-over relief available to settlor-interested disabled person’s trust ― see the Hold-over relief guidance note•trust for a disabled person entitled to
Discounted gift schemes
Discounted gift schemesDiscounted gift schemesThese types of scheme are particularly suitable for those who have available liquid assets which can be realised without incurring any substantial tax liability (such as Capital Gains Tax). In essence, the money is transferred into the scheme with the tax payer retaining a right to a pre-determined series of cash payments during his or her lifetime. Whatever else remains in the scheme at the time of his death is given away at the outset to his or her children or grandchildren or other beneficiaries. Therefore, there is a lifetime gift to those beneficiaries but the value of it is discounted to take account of the value of the right retained by the tax payer.The schemes are usually operated by life insurance companies with the funds invested in a single premium investment bond. This structure is ideal for an arrangement where the pre-established return is to be paid back to the person setting up the scheme, because the legislation relating to single premium bonds permits up to 5% of the initial premium paid to be withdrawn tax free each year for 20 years (a return of capital).The schemes are
Appointment of trustees
Appointment of trusteesThe office of trusteeThe trustees’ role is to hold the assets of the trust for the benefit of the beneficiaries. To assist the trustees in this task, they are given extensive powers and wide-ranging discretion to exercise those powers. The trustees’ powers derive principally from the trust deed, but are also supplemented by additional powers established in both statute and in case law. See the Trustee’s powers and duties guidance note.This guidance note deals with the appointment of trustees. The removal and retirement of trustees is covered in the Changing trustees guidance note.Who can act as trustee?The role of a trustee is not one that should be undertaken or imposed lightly. The very nature of the word implies that he or she must be of the utmost trustworthiness, as there are significant fiduciary duties imposed on trustees.But, from a strictly legal point of view, anyone who has capacity to hold property can act as a trustee. This means that minors cannot be appointed as trustees. People who lack the mental capacity to exercise the functions of a trustee also cannot act, and should either not be appointed in the first place or should be replaced if they lose capacity. There are, of course, many levels of unsoundness of mind that might render a person unfit to act as a trustee, and reference should be made to the Mental Capacity Act 2005, ss 2 and 3 in particular. These sections provide that a person lacks capacity in relation
Cash dividends
Cash dividendsIntroductionA dividend is a distribution of profit by a company to its shareholders.A dividend is not only a payment in cash. It can be the issue of new shares in exchange for forfeiting the right to a cash payment (a stock dividend). For more detail, see the Non-cash dividends guidance note.This guidance note deals with cash dividends from UK resident companies. For more on dividends from overseas resident companies, see the Foreign dividends guidance note.The taxation of dividends is discussed in the Taxation of dividend income guidance note.Cash dividends from UK resident companiesCash dividends paid by UK companies on or after 6 April 2016 have no dividend tax credit attached, meaning the amount received is the amount which is taxable. The company should issue the shareholder with a dividend voucher showing the number of shares held by the shareholder, the dividend paid and the date of payment.The amount reported in box 4 of the main tax return is the total dividends received from UK resident companies in the tax year (ie the arising basis of assessment). Dividends are reported on box 5.3 of the short tax return, see the Short tax return guidance note.The taxation of dividends is discussed in the Taxation of dividend income guidance note.UK cash dividends received by non-residents (2016/17 onwards)The tax position of non-residents in receipt of UK cash dividends is not straightforward. See the Taxation of dividend income guidance note.Dividend tax credit (dividends arising before 6 April 2016)Cash dividends paid by UK companies
Non-domiciled and deemed domiciled beneficiaries
Non-domiciled and deemed domiciled beneficiariesIntroductionThe current tax position of non-domiciled and deemed domiciled beneficiaries of non-resident trusts is a complex landscape mapped by successive changes in the law. Before 2008, UK resident but non-domiciled beneficiaries were protected by a cost-free remittance basis option for income tax and, like non-domiciled settlors, they were exempt from attribution of capital gains within the trust. Major changes in 2008, 2017 and 2018 have incrementally brought non-domiciles into the regime under which UK domiciled beneficiaries of non-resident trusts are taxed.Changes introduced in 2008 scaled down some of the advantages of long-term non-domiciled status. The remittance basis charge was introduced to impose a cost on accessing the benefits of the remittance basis. See the Remittance basis ― overview guidance note in the Personal Tax module. At the same time, changes were made to the taxation of non-domiciled beneficiaries of non-resident trusts to bring their benefits from the trust within the scope of capital gains tax.Notwithstanding the imposition of a charge for the use of the remittance basis, public and political opinion continued to oppose the non-domiciled advantage. As a result,
Why do people use trusts?
Why do people use trusts?Trusts have a long history of use as a means for people to protect their assets and to control their management as well as how those assets are transferred to others. The elements of protection and control are key to understanding the reasons why people use trusts. Flexibility is also an important factor. Finally, tax issues may influence the use of a trust. A trust is a more costly and complex way of passing on property than an outright gift and so will only be used where there are benefits over and above an outright gift.This note explains some of the general reasons for using trusts both during lifetime and on death. ControlA trust exists where someone (a trustee) holds assets for the benefit of others (the beneficiaries). The person who transfers assets to the trustees (the settlor) sets the agenda at the outset and decides the extent of the beneficiaries’ interests and the powers available to the trustees (so can choose a fixed or flexible trust). This is the control element, which starts off with the settlor and moves across to the trustees.Retaining control over the ultimate destination of assets is an important reason for using trusts. The settlor can immediately divest himself of ownership and yet the existence of a trust prevents ownership passing straight onto the beneficiaries. The settlor / trustees decide the timing and extent of the beneficiaries’ interests. This way, ownership can be transferred over gradually to the next generation.Retaining
Capital losses
Capital lossesCalculations and claimsLosses arising to trustees are calculated in the same way as they are for individuals. Capital losses are automatically set against any gains of the same tax year; 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 are only 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 the annual tax return as a matter of routine, even though there is no requirement to do so. Then, if gains are made in the future, the losses available for set-off have been recorded and claimed. Once claimed, losses can be carried forward indefinitely. These general rules are discussed in the Use of capital losses guidance note in the Personal Tax module in relation to individuals, but the same principles apply to trustees and personal representatives.Trustees’ use of lossesSale of trust assetsIf trustees make an arms-length disposal of trust assets for a sum
Calculation of principal (10-year) charge before 18 November 2015
Calculation of principal (10-year) charge before 18 November 2015Trustees of a relevant property trust are charged to inheritance tax on each tenth anniversary after the trust was created. This charge is known as any of the following:•the principal charge•the periodic charge•the 10-year charge•the decennial chargeIHTA 1984, s 64(1)This guidance note explains how to work out the amount of tax payable when the ten year anniversary fell before 18 November 2015 and the trust was created after 27 March 1974. Changes to the elements of the calculation were introduced in F(No 2)A 2015. The current method of calculation for occasions of charge arising on or after 18 November 2015 is described in the Principal (10-year) charge guidance note.See the Relevant property guidance note for an explanation of what relevant property is and how the date of the anniversary is determined.The basis of the principal chargeThe principal charge is levied on the value of the relevant property owned by the trustees immediately before a 10-year anniversary of the trust. Therefore the first job in dealing with a principal charge is to establish a current valuation of the property within
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