TAXATION & TRUSTS
Can Trusts eliminate the tax I pay?
Assets assigned to Trust can potentially reduce the tax payable. - Trusts are also subject to tax, but appropriate management by the Trustees can reduce any amount due substantially.
- Trusts can significantly reduce the impact of tax on future generations.
Can Trusts Reduce Or Eliminate The Tax I Pay?
In Detail
Trusts have been instrumental in mitigating tax since Medieval times. Trusts were initially created for the Nobility and wealthy landowners to avoid paying taxes to the Crown.
The introduction of Trusts led to a distinct loss of tax revenue and it did not take long for the first anti-avoidance statute to be introduced; by Henry VIII in 1535.
Since then, there have been many changes to Trusts and their uses and equally to the Inland Revenue rules which affect them.
Nowadays, you don’t have to be a nobleman, or a wealthy landowner to want to take advantage of the many tax strategies Trusts can provide.
Many people now look to using Trusts as a means of mitigating tax which would otherwise be payable.
There are four types of tax which could affect you and your estate:
Corporation Tax
Corporation tax is paid by limited companies on their profits. Corporation tax is not payable by the self-employed but does apply to the following organisations, even if they are not limited companies:
• members' clubs, societies and associations.
• trade associations.
• housing associations.
• groups of individuals carrying on a business but not as a partnership, eg co-operatives.
There are two rates. The two rates of corporation tax - the small companies' and main rate - relate to a level of profit. When a company's profit level changes from the small companies' rate to the main rate, marginal relief is available to ease the transition.
Capital Gains Tax
CGT is a tax on capital ‘gains’. If when you sell or give away an asset it has increased in value, you may be taxable on the ‘gain’ (profit). This doesn’t apply when you sell personal belongings worth £6,000 or less or in most cases, your main home.
You may have to pay CGT if for example, you:
• sell, give away, exchange or otherwise dispose of (cease to own) an asset or part of an asset.
• receive money from an asset - for example compensation for a damaged asset.
You don’t have to pay CGT on:
• Your car.
• Your main home - provided certain conditions are met.
• ISAs or PEPs
• UK Government gilts (bonds)
• Personal belongings worth £6,000 or less when you sell them.
• Betting, lottery or pools winnings. • Money which forms part of your income for income tax purposes.
These are some points to bear in mind:
• If you are married or in a civil partnership and living together you can transfer assets to your husband, wife or civil partner without having to pay CGT.
• You can't give assets to your children or others or sell them cheaply without having to consider CGT.
• If you make a loss you may be able to make a claim for that loss and deduct it from other gains, but only if the asset normally attracts CGT - for example you cannot set a loss on selling your car against gains from disposing of other assets.
• If someone dies and leaves their belongings to their beneficiaries, there is no CGT to pay at that time - however if an asset is later disposed of by a beneficiary, any CGT they may have to pay will be based on the difference between the market value at the time of death and the value at the time of disposal.
Inheritance Tax
This is a tax on the value of a person’s estate on death and on certain gifts made by an individual during their lifetime. Broadly speaking your estate is everything you own at the time of your death, less what you owe. It’s also sometimes payable on assets you may have given away during your lifetime. Assets include things like property, possessions, money and investments.
The Inheritance Tax threshold is the amount above which Inheritance Tax becomes payable. If the estate, including any assets held in trust and gifts made within seven years of death, is less than the threshold, no Inheritance Tax will be due on it.
It only applies if the taxable value of your estate is above the current threshold and is only payable on the excess above this nil rate band.
The rate at which Inheritance Tax is charged is 40%.
Income Tax
Income Tax is a tax on income. Not all income is taxable - and you’re only taxed on ‘taxable income’ above a certain level. Even then, there are other reliefs and allowances that can reduce your Income Tax bill - and in some cases mean you have no tax to pay.
Taxable income includes:
• Earnings from employment
• Earnings from self-employment
• Most pensions income (State, company and personal pensions)
• Interest on most savings
• Income from shares (dividends)
• Rental income
• Income paid to you from a trust
Non-taxable income
There are certain sorts of income that you never pay tax on. These include certain benefits, special pensions and income from tax exempt accounts. These are ignored altogether when working out how much Income Tax you may need to pay.
So whether you own your own business and your concern is Corporation Tax, own property or hold other forms of assets which would fall prey to Capital Gains Tax, or believe Inheritance Tax will become an issue for your intended beneficiaries, Staff Services Legal Advisers can provide you with the correct type of tax planning to ensure as much tax as possible is saved.
Our Legal Advisers are experts in providing advice on all aspects of tax planning and with the use of Trusts, will provide these ultimate tax savings.
Why should I use a Professional Trustee?
Not choosing a Professional Trustee could mean your beneficiaries lose out.
Where Trustees are also named as beneficiaries, this can often lead to disputes.
A Professional Trustee is completely unbiased and will uphold the Settlor’s wishes.
A Professional Trustee will ensure the beneficiaries’ inheritance is protected.
A Professional Trustee will advise on any tax saving strategies available.
In Detail
Why Should I Use A Professional Trustee?
The role of a Trustee can be extremely daunting for an untrained person and often decisions will be made which may not be completely in the interest of the beneficiary(s). This may be simply because the Trustees do not have a clear understanding of the impact their decisions may have on the beneficiary’s inheritance.
Our Legal Advisers give consideration to the tax status, financial status and marital situation of the intended beneficiary (ie if the beneficiary were undergoing financial difficulties or entering into Divorce Proceedings). This ensures that the assets would not be lost to creditors or future ex-spouses.
Their advice can be crucial in preserving assets and ensuring as much as possible is received by the intended beneficiary(s) and is not lost to tax, divorce or in settlements to creditors.
Many people when creating Trusts appoint their children or other family members as Trustees.
The Trustees are often also the beneficiaries to the deceased’s estate and this fact may pose some real problems after the death of the Settlor (the owner of the Trust).
Once the deceased’s assets have entered the Trust, a Trustees meeting must be held and any decisions regarding the distribution of these assets have to have the agreement of ALL of the Trustees. As we are all aware, this can often prove to be an issue within some families.
Appointing a Professional Trustee, which Staff Services can recommend, will ensure that a totally unbiased approach is taken when dealing with the deceased’s assets and that the Settlor’s wishes are completely upheld.
There can generally be any number of Trustees but for our own and most Trusts, the number ranges from 2 – 4. It is possible for an institution to act as a Trustee and it is possible for the same person to be both a Trustee and a beneficiary.
Benefits of having a Professional Trustee
• As authors and creators of the Family Trust, our Legal Advisers are best placed to make any future amendments that could be necessary to ensure the maximum efficiency of the Trust
• Best use of tax legislation, optimising Trust efficiency both before and after first and second death
• Efficient advisory service in the assignment/retirement of Trustees
• All of Staff Services Legal Advisors have extensive experience and advanced qualifications in the areas of Retirement, Taxation and Trust Planning.
Remember, whilst you have the reassurance of professional expertise behind you, there is no annual fee levied.
The Trustee’s Duties can be summarised as follows:
• All Trustees should familiarise themselves with the terms of the Trust so that they can administer it in accordance with the Trust deed.
• All dealings with the Trust fund by the Trustees must be for the benefit of the beneficiaries.
• The Trustees must use their utmost diligence to avoid any loss. If they are negligent and a loss arises they may be responsible for that loss to the beneficiaries.
• All Trustees must act unanimously. Under English law, Trustee's decisions cannot be made by a majority of Trustees unless the Trust specifically allows this.
Trustees Powers and Duties
There are several statutory powers and these can be quite comprehensive. The following highlights just a few of the main powers:
• Trustee powers of investment – Section 3 of the Trustee Act 2000 permits Trustees to “make any kind of investment that he/she could make if he/she were absolutely entitled to the asset of the Trust”. This provision is subject to any restriction imposed by the Trust itself.
• Act in the best interest of all beneficiaries – The Trustees must judge the suitability of investments having regard to the best interests of all beneficiaries, past and present.
• Exercise reasonable care and skill – A Trustee must pay regard to any specialist knowledge or experience that he/she holds.
• Review investments from time to time – Trustees must undertake periodic reviews of the investments held by the Trust.
• Take proper advice – When considering any investments, or when carrying out a review of the investments of the Trust, the Trustees must obtain and consider proper advice.
• Power to apply income for the benefit of child beneficiaries – The Trustees have the discretion to apply the whole or part of the income of a Trust for the maintenance, education or benefit of a child beneficiary
• Power to delegate – The Trustee Act 2000 empowered Trustees to delegate to agents any of their functions except certain defined responsibilities
Trustees Common Law Responsibilities
Below are highlighted just some of the many Common Law Responsibilities a Trustee has:
• A duty to take account of the Settlor’s wishes A Settlor may sometimes write a ‘side letter’ to the Trustees containing an ‘expression of wishes’. This is not binding upon theTrustees, but would stand alongside the Trust document and provide guidance to the Trustees as to the way in which the Settlor would like them to carry out their duties.
• Duty to ensure fairness between beneficiaries – The Trustees must hold the balance fairly between different categories of beneficiary e.g. if a Trust provides that one class of beneficiary is to receive the income from the Trust fund during their lifetime and a second class is to receive capital on the death of the income recipient, it would be unfair to the income recipient if the Trustees were to invest in assets which produce little or no income, but offered the prospect of greater than usual capital growth.
• Duty to take account of tax considerations – The Trustees must take into account considerations such as tax and administrative costs when choosing investments.
The above duties are just a few of the main considerations. With the use of a Professional Trustee, it is within their day to day routine to ensure that all of the Trustee’s duties are followed.
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