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INHERITANCE TAX RESIDENCE NIL-RATE BAND
TRUSTS
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You may want to consider putting some of your assets into a trust for a loved one. Trusts are a way of managing wealth, money, investments, land or property, for you, your family or anyone else you’d like to bene t. ey are used to protect family wealth for future generations, reducing the intergenerational ow of Inheritance Tax and ensuring bloodline protection for your estate from outside claims. e way in which assets held within trusts are treated for Inheritance Tax purposes depends on whether the choice of bene ciaries is xed or discretionary. ere are lots of di erent types of trust and some will allow you to ‘ring-fence’ the money or property so that it sits outside of your estate when you die. e most popular types of trust commonly used for Inheritance Tax planning can usually be written on either an ‘absolute’ or a ‘discretionary’ basis and the taxation treatment is very di erent for each.
A trust is a duciary arrangement that allows a third party, or trustee, to hold assets on behalf of a bene ciary or bene ciaries. Once the trust has been created, a person can use it to ring-fence assets.
Trusts terms:
Settlor – the person setting up the trust. Trustees – the people tasked with looking a er the trust and paying out its assets. Bene ciaries – the people who bene t from the assets held in trust.
EXTENDING THE SCOPE OF THE TRUST REGISTER
When you put assets in a trust, they are under the control of an appointed person or persons called ‘trustees’. e trustees then manage the trust according to your instructions, even a er your death.
New rules were introduced on 6 October 2020, as part of the UK’s implementation of the Fi h Money Laundering Directive (5MLD), that extend the scope of the Trust Register to all UK and some non-UK trusts that are currently open, whether or not the trust has to pay any tax, but with some speci c exclusions.
PREVENTATIVE WORK IN THE FIELD OF ANTI-MONEY LAUNDERING
From 1 September 2021, the extended Trust Registration Service (TRS) opened for non-taxable trust registrations, with non-taxable trusts having until 1 September 2022 to register. Under the new rules, organisations and persons involved in preventative work in the eld of anti-money laundering, counter-terrorist nancing and associated o ences can request access to details on the register about the people associated with a trust. e information will only be released on request in certain limited circumstances and anyone with a legitimate interest will be able to view information on the TRS from late 2022. HMRC has stated that ‘each request will be reviewed on its own merits, and access given only where there is evidence that it furthers work to counter money laundering or terrorist nancing activity.’ ere are also safeguarding measures to protect trusts with minors and vulnerable bene ciaries from requests for information from third parties.
TRUSTS THAT NEED TO BE REGISTERED
Trusts that need to be registered are broadly all UK express trusts, unless they are speci cally excluded; and non-UK express trusts that acquire land or property in the UK, or have at least one trustee resident in the UK and enter into a ‘business relationship’ within the UK. If the trust needs a Unique Taxpayer Reference (UTR) for Self Assessment purposes, it must still register to get this, even if it’s highlighted in the exclusion list.
TRUSTS THAT DO NOT NEED TO BE REGISTERED
Certain trusts do not need to register unless they are liable to pay UK tax.
ese include:
trusts used to hold money or assets of a
UK-registered pension scheme, such as an occupational pension scheme trusts used to hold life or retirement policies providing that the policy only pays out on death, terminal or critical illness or permanent disablement, or
to meet the healthcare costs of the person assured trusts holding insurance policy bene ts received a er the death of the person assured, providing the bene ts are paid out from the trust within two years of the death charitable trusts which are registered as a charity in the UK or which are not required to register as a charity ‘pilot’ trusts which were set up before 6
October 2020 and which hold no more than £100 – pilot trusts set up a er 6
October 2020 will need to register co-ownership trusts set up to hold shares of property or other assets which are jointly owned by two or more people for themselves as ‘tenants in common’ Will trusts which are created by a person’s Will and come into e ect on their death providing they only hold the estate assets for up to two years a er the person’s death trusts for bereaved children under 18 or adults aged 18 to 25 set up under the
Will (or intestacy) of a deceased parent or the Criminal Injuries
Compensation Scheme ‘ nancial’ or ‘commercial’ trusts created in the course of professional services or business transactions for holding client money or other assets
which are set up for particular purposes are also excluded from registration unless they have to be registered because they are liable to pay tax. ese are set out in the legislation and will be described in the detailed guidance.
Trusts which are not set up deliberately by a settlor but are imposed by Courts or created by legislation are not ‘express trusts’ and therefore do not have to register unless they are liable to tax.
Examples of such trusts include a trust:
set up under the intestacy laws when a person dies without a valid Will and the assets in the estate are held by a trust before passing to relatives set up under a Court Order to hold compensation payments to hold jointly owned assets, such as a home jointly owned with a spouse, partner or relation as ‘joint tenants’, or a joint bank account
TAXABLE AND NON-TAXABLE TRUSTS
You should obtain professional advice if you are unsure whether a product or arrangement is a trust or if it should be registered. e trustees or agents will have to give some basic information about the persons involved in the trust (the settlors and bene ciaries). is will apply to both taxable and non-taxable trusts.
Registerable taxable trusts are required to register by 31 January following the end of the tax year in which the trust had a liability to UK taxation, or 5 October a er the end of the tax year for a rst-time liability to Income Tax or Capital Gains Tax.
FURTHER GUIDANCE AND CONFIRMATION
From 2022 onwards, any bene cial ownership information of a trust registered on TRS must be kept updated. Trustees must notify HMRC of any changes to registered information within 90 days from the date the trustees become aware of the change; further guidance and con rmation of procedures is expected from HMRC in due course.
BARE TRUST
Held for the bene t of a speci ed bene ciary
Bare Trusts are also known as ‘Absolute’ or ‘Fixed Interest Trusts’, and there can be subtle di erences. e settlor – the person creating the trust – makes a gi into the trust, which is held for the bene t of a speci ed bene ciary. If the trust is for more than one bene ciary, each person’s share of the trust fund must be speci ed.
For lump sum investments, a er allowing for any available annual exemptions, the balance of the gi is a Potentially Exempt Transfer for Inheritance Tax purposes. As long as the settlor survives for seven years from the date of the gi , it falls outside their estate. e trust fund falls into the bene ciary’s Inheritance Tax estate from the date of the initial gi . With Loan Trusts, there isn’t any initial gi – the trust is created with a loan instead. And with Discounted Gi plans, as long as the settlor is fully underwritten at the outset, the value of the initial gi is reduced by the value of the settlor’s retained rights.
INCOME EXEMPTION
When family protection policies are set up in Bare Trusts, regular premiums are usually exempt transfers for Inheritance Tax purposes. e normal expenditure out of income exemption o en applies, as long as the cost of the premiums can be covered out of the settlor’s excess income in the same tax year, without a ecting their normal standard of living.
Where this isn’t possible, the annual exemption o en covers some or all of the premiums. Any premiums that are non-exempt transfers into the trust are Potentially Exempt Transfers. Special valuation rules apply when existing life policies are assigned into family Trusts. e transfer of value for Inheritance Tax purposes is treated as the greater of the open market value and the value of the premiums paid up to the date the policy is transferred into trust.
PARENTAL SETTLEMENT
ere’s an adjustment to the premiums paid calculation for unit-linked policies if the unit value has fallen since the premium was paid. e open market value is always used for term assurance policies that pay out only on death, even if the value of the premiums paid is greater.
With a Bare Trust, there are no ongoing Inheritance Tax reporting requirements and no further Inheritance Tax implications. With protection policies, this applies whether or not the policy can acquire a surrender value.
Where the Trust holds a lump sum investment, the tax on any income and gains usually falls on the bene ciaries. e most common exception is where a parent has made a gi into trust for their minor child or stepchild, where parental settlement rules apply to the Income Tax treatment.
TRUST ADMINISTRATION
erefore, the trust administration is relatively straightforward, even for lump sum investments. Where relevant, the trustees simply need to choose appropriate investments and review these regularly.
With a Bare Trust, the trustees look a er the trust property for the known bene ciaries, who become absolutely entitled to it at age 18 (age 16 in Scotland). Once a gi is made or a Protection Trust set up, the bene ciaries can’t be changed, and money can’t be withheld from them beyond the age of entitlement. is aspect may make them inappropriate to many clients who’d prefer to retain a greater degree of control.
TRUST FUND
With a Loan Trust, this means repaying any outstanding loan. With a Discounted Gi Trust, it means securing the settlor’s right to receive their xed payments for the rest of their life. With protection policies in Bare Trusts, any policy proceeds that haven’t been carved out for the life assured’s bene t under a Split Trust must be paid to the trust bene ciary if they’re an adult. Where the bene ciary is a minor, the trustees must use the trust fund for their bene t.
Di culties can arise if it’s discovered that a trust bene ciary has predeceased the life assured. In this case, the proceeds belong to the legatees of the deceased bene ciary’s estate, which can leave the trustees with the task of tracing them. e fact that bene ciaries are absolutely entitled to the funds also means the trust o ers no protection of the funds from third parties, for example, in the event of a bene ciary’s divorce or bankruptcy.
