If you are a Trustee a new rule means that you may have to complete the new online HMRC trust register. The register has been introduced as part of new EU Money Laundering legislation. According to HMRC around 162,000 trusts complete a self-assessment each year. And their trustees will now need to submit details of the trust and the all the parties to it before the end of the tax year. HMRC anticipate that the register will be up and running by July.
Broadly, all trusts that have a UK tax liability will be required to provide significantly more information, and the register must be updated every year a tax liability arises.
But if the trust’s sole asset is an investment bond, it may not be required at all. A bond may relieve trustees from these extra responsibilities due to their unique tax deferral features.
What information is required?
Detailed information will need to be gathered on the trust and all parties to it – i.e. the settlors, trustees and beneficiaries. Previously when notifying HMRC of the creation of a trust (the paper form 41G, now withdrawn), beneficiary details were not needed.
The new trust register requires the details of all beneficiaries including potential beneficiaries, even though they may never benefit. Where a class of beneficiaries has been used, such as the children of Joe Bloggs, a description of the beneficial class is sufficient. However the address, National Insurance number or tax payer reference of any named beneficiaries, including anyone specified in a letter of wishes, will be required. And passport details are needed for any individuals who are non-UK resident.
In addition, the trustees will also be required to provide the details of any adviser who is being paid to provide them with tax, financial or legal advice.
Which trusts need to be recorded on the trust register?
Typically, the trusts that need to be recorded are those created during lifetime or in the will of a deceased person. And crucially it’s only those trusts, both UK and non-UK resident trusts, which have some UK tax to pay. Fortunately pension schemes trustees are excluded.
Other trusts that don’t have to be added to the register include bare trusts, as the income from these will usually be taxed on the beneficiary directly.
The trustee’s actions, the type of trust and the underlying investments can all create situations where tax becomes due and result in the trustees having to update the register.
Some of the common things to look out for include:
- Income tax. Trustees of discretionary trusts must pay income tax on interest, dividends or rental income received. However, the trustees of an interest in possession trust may have no tax to pay if all the income they receive is mandated directly to the beneficiary.
- Capital gains tax. Where the trustees make a disposal of assets, for example by rebalancing a portfolio of collectives, it may give rise to a CGT liability for the trustees. Where trustees appoint assets to a beneficiary, this too would be a disposal for CGT. There may also be a disposal for CGT where the beneficiary of a contingent trust takes an absolute interest.
- Inheritance tax. Relevant property trusts will be subject an IHT charge every 10 years if the trust value is greater than the available nil rate band. There may also be IHT to pay when capital leaves the trust, for example when it’s paid to a beneficiary.
- Stamp duty. The trustees may have to pay Stamp Duty Land Tax if the purchase residential or commercial property in excess of the threshold. Stamp duty Reserve Tax may also become due on the acquisition of company shares.
How bonds can help
Investment bonds have always been a popular investment with trustees. They offer a simple solution with minimal tax reporting while allowing funds to be switched freely. Bonds are non-income producing with income and gains rolling up within the plan. Consequently, income tax may only be due when the policy comes to an end or withdrawals of more than the 5% cumulative allowance are taken. And, unlike other similar investments, chargeable gains remain assessable upon the settlor during their lifetime. So trustees only have tax to pay if the settlor is no longer alive.
When trustees are ready to make an appointment to the beneficiary they can assign the bond (or segments) to them without creating a chargeable event. The beneficiary then takes ownership of the bond and can surrender at an appropriate time, with any gains assessed upon them with benefit of their own allowances and tax rates.
Trustees who just hold an investment bond may never have any tax to pay on the income or growth on the trust assets. And that means that they may never need to complete the trust register. But remember that some larger trust funds may still need to report if there are IHT relevant property charges to pay.
Bonds won’t be appropriate in all cases. Sometimes the terms of a trust give a beneficiary a right to the income from the trust. Withdrawals from a bond are generally treated as capital payments even though any chargeable gains are subject to income tax. Trustees of these trusts should be looking to invest to provide a natural income.
Packaged IHT solutions
Most packaged IHT solutions, such as Loan Trusts and Discounted Gift Trusts, use bonds as the underlying investment.
There are only limited circumstances where the trustees would be required to complete the register. Only chargeable gains which arise after the settlor’s death may create an income tax liability upon the trustees. This could occur if the trustees need to surrender the bond to repay any outstanding loan on a loan trust. With a DGT, often the trustees will assign the bond to the beneficiary rather than surrender themselves.
IHT relevant property charges can apply to both loan trusts and DGTs. However, the market value of the trust at the 10 year point will often be much lower than the actual surrender value of the bond. This could bring the value below the available nil rate band and mean no IHT is payable.
Withdrawals made to repay the loan under a loan trust are not exits for IHT charges as capital is not leaving the trust. And the settlor’s retained payments from a DGT are deemed to be held upon bare trust for the settlor and are not relevant property.