Taxation of trusts ― introduction

Produced by Tolley
Taxation of trusts ― introduction

The following Trusts and Inheritance Tax guidance note Produced by Tolley provides comprehensive and up to date tax information covering:

  • Taxation of trusts ― introduction
  • Introduction
  • Beneficiaries’ entitlement
  • Bare trust
  • Fixed interest ― interest in possession
  • Fixed interest ― accumulation and maintenance
  • Discretionary interest
  • Flexible or combined trust
  • Inheritance tax
  • Income tax
  • More...

Introduction

The taxation of trusts is based on the personal tax regime. Trusts are subject to the same taxes as individuals: income tax, capital gains tax and inheritance tax. However, the application of those taxes varies according to the status and terms of the trust. The determining factor is most commonly the entitlement of the beneficiaries. Other relevant factors are the date of commencement of the trust, the age of the beneficiaries and whether it was created during lifetime or on death. Therefore, the first step in working out how a trust is to be taxed is to examine the trust document to assess what type of trust it is.

Beneficiaries’ entitlement

Trust property is held by trustees for the benefit of beneficiaries. The beneficiaries’ rights to the property are set out in the trust document or established by law. A trust fund comprises:

  1. capital (consisting of the original property transferred into trust, replacements and additions to it, and capital gains)

  2. income (consisting of the income earned on the trust capital)

The tax status of the trust depends on the beneficiaries’ entitlement to capital and income.

Bare trust

A ‘bare trust’ is not a trust at all for tax purposes. The term applies where the beneficiary of a trust has an absolute right to both capital and income. Beneficial ownership of the trust property lies with the beneficiary, although, it may be held legally by or ‘in the name of’ the trustees. The most obvious example is where assets are held for the absolute benefit of a minor (who cannot legally own the asset). See the Bare trusts ― IHT guidance note for examples of bare trusts.

Fixed interest ― interest in possession

The term ‘interest in posses

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