What, if any, taxes apply to trusts or other asset-holding vehicles in your jurisdiction, and how are such taxes imposed?
Trusts are recognised in England and Wales. A trust is not a separate legal entity. It is a relationship that can be defined as an equitable obligation binding a person (the trustee) to deal with property over which he or she has control (the trust property) for the benefit of persons (the beneficiaries) of whom he or she may him or herself be one, and any one of whom may enforce the obligation.
While a trust is not a legal entity, it is a taxable entity, and UK-resident trustees are responsible for completing tax returns and paying tax.
IHT
For IHT purposes, the treatment of a trust varies according to whether the trust is a relevant property trust. Relevant property trusts include:
- discretionary trusts, where no beneficiary has a fixed interest in the trust assets unless and until the trustees make an appointment in his or her favour; and
- life interest (or interest in possession) trusts created during the settlor’s lifetime on or after 22 March 2006. A life interest trust is one in which one or more beneficiaries have an immediate right to the income of the trust. (In certain circumstances, life interest trusts created prior to 22 March 2006 may subsequently qualify as relevant property trusts.)
Relevant property trusts are liable to IHT on each 10-year anniversary at a rate of up to 6 per cent of the value of any assets in excess of the nil-rate band. An exit charge or ‘proportionate charge’ of up to 6 per cent is also imposed when property leaves the trust. There are rules in place to prevent individuals avoiding IHT through the use of multiple trusts, each with its own nil-rate band. The rules apply to settlements created on the same day (‘related settlements’) and, with certain limited exceptions, now also apply to two or more relevant property trusts created on different days where, on or after 10 December 2014, property is added to each of them on the same day and after the commencement of those trusts.
There are no IHT charges on life interest trusts that do not qualify as relevant property trusts because the assets are treated as forming part of the life tenant’s taxable estate on death. The life tenant’s death is not a taxable event in the case of a relevant property trust.
Certain trusts created on the death of a parent from which a minor or young person under the age of 25 can benefit are also treated differently for IHT purposes.
Trusts established by individuals domiciled outside the UK may be excluded property trusts for the purposes of IHT to the extent that property held within them is situate outside the UK. Such property is not subject to either 10-year anniversary charges or exit charges. Under existing law, property situate in the UK other than residential property is outside the scope of IHT, provided that it is not held directly by the trustees but instead through a non-UK situated company or other vehicle. For UK residential property held through offshore vehicles (whether owned by trustees or individuals) this changed with effect from 6 April 2017, so that such property no longer escapes a charge to IHT. Excluded property trusts established by non-UK domiciled individuals who were born in the UK with a UK domicile of origin are also treated as relevant property trusts for IHT purposes during any period in which such individuals are resident in the UK.
Income tax and CGT
Trustees of UK-resident discretionary trusts pay income tax at the relevant rate applicable to income (currently 38.1 per cent for dividend income and 45 per cent otherwise for trust income over £1,000) and CGT (at 20 per cent generally or 28 per cent for carried interest and residential property) on their worldwide income and gains.
Trusts are treated as UK-resident for both taxes if all the trustees are UK-resident, or if at least one of the trustees is UK-resident and the settlor was UK-resident or domiciled or deemed to be so domiciled for tax purposes when he or she created the trust (on death or otherwise) or subsequently added funds to it.
A trustee who is not otherwise UK-resident will be treated as such if the trustee acts as such in the course of a business that the trustee carries on in the UK through a branch, agency or permanent establishment.
Trustees of non-UK resident trusts pay income tax only on UK income. On disposals of UK residential property held directly by the trustees, they pay CGT on gains arising after 5 April 2015. On disposals of non-residential property in the UK held directly by the trustees, they pay CGT on gains arising after 5 April 2019.
Trustees of non-UK resident trusts are also taxable on certain indirect disposals of UK land (residential and non-residential). The indirect disposal rules apply where trustees make a disposal of an entity that derives 75 per cent or more of its gross asset value from UK land. There is an exemption for investors in such entities who hold an interest of less than 25 per cent.
As for non-resident individuals, detailed rules apply to the taxation of the trustees of non-UK resident trusts in these circumstances, and exemptions may be available in certain situations.
There are also complex anti-avoidance rules in place that, in appropriate circumstances, attribute for tax purposes other income or gains of such trusts and their underlying companies to UK-resident settlors or beneficiaries.
Stamp Duty Land Tax and other property-related taxes
Trustees are liable to Stamp Duty Land Tax (SDLT) on acquisitions of real property, whether residential or non-residential, on the same basis as individuals. This will include non-residential SDLT, where relevant, for acquisitions made on or after 1 April 2021.
Taxes including council tax, ATED, VAT and Stamp Duty may also be relevant to trustees.
England & Wales Guide
The England & Wales guide answers the principal questions for Private Clients relating to the law in this jurisdiction.
