Trust Tax Planning: Minimising Tax Through Trust Structures

Trusts are widely used in estate planning for both tax efficiency and asset protection, but their tax treatment in England and Wales can be intricate. Understanding the different types of trusts and how they are taxed is key to making the most of these arrangements.

Types of Trusts

Interest in possession trusts give beneficiaries a right to trust income, while discretionary trusts allow trustees to decide how and when to distribute income or capital. Accumulation trusts retain income within the trust, and bare trusts give beneficiaries an absolute right to the assets.

Inheritance Tax and Trusts

For Inheritance Tax, most trusts fall under the relevant property regime. This means there can be a 20% entry charge on lifetime transfers above the nil rate band, periodic charges of up to 6% every ten years, and exit charges when assets leave the trust. These charges can significantly affect the long-term value of trust assets.

Income Tax and Distributions

Income tax is charged at different rates depending on the trust type, and careful planning around the timing and amount of distributions can help minimise tax. Beneficiaries’ own tax positions should also be considered, as distributions may be taxed at their marginal rates.

Capital Gains Tax Considerations

Capital Gains Tax (CGT) applies to trusts at specific rates, with annual exemptions available. Holdover relief can defer gains when assets are transferred into trusts, and business asset disposal relief may reduce CGT on qualifying business assets. Principal private residence relief can also apply to residential property in some cases.

Planning and Review

Effective trust planning might involve using the nil rate band, considering family investment companies as an alternative, or using insurance bonds for tax efficiency. Offshore trusts can be an option, but they come with their own set of rules for UK residents.

Trust tax rules change frequently, so regular reviews are essential to keep your arrangements effective and compliant.

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Disclaimer: This blog post provides general information for educational purposes only. It is not legal advice. Outcomes can vary based on your personal circumstances.