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The taxation of trusts continues to evolve. This blog sets out the situation that applies from 6 April 2024.
Capital gains tax from 6 April 2024
The capital gains tax (CGT) annual exempt amount available to trustees is reduced to £1,500 from 6 April 2024. The annual exempt amount (AEA) is the amount of capital gains that trustees can realise during a tax year that is exempt from capital gains tax.
Trustees also need to be aware that where a settlor has established multiple settlements (generally, most trusts apart from bare trusts), the trust annual exempt amount is apportioned across each settlement, subject to a de minimis limit of 1/5 of the AEA per settlement where 5 or more settlements have been created (and are in existence during the relevant tax year).
For example, if a settlor has created 4 settlements, the AEA of £1,500 in 2024-25 would be apportioned at £375 per settlement. It is not possible to transfer any ‘unused’ AEA from one settlement to another. Where 5 or more settlements have been created, the AEA available to each is £300.
For jointly settled trusts, it is the settlor who has established the higher number of trusts that determines how the AEA is apportioned for that trust.
Any taxable capital gains that exceed the trust’s AEA are assessed for CGT at 20% or 24% if the gain arises from the disposal of residential property (reduced from 28% in 2023-24). The rate for carried interest remains 28%.
Reviewing investment portfolios
Trustees may wish to review investment portfolios in light of the reductions to annual exempt amounts to ensure that unexpected capital gains (and therefore CGT liabilities) are not triggered, especially, for example, portfolios which may be regularly rebalanced, sometimes automatically, to maintain a target asset allocation in the portfolio.
Capital losses
With the reduction to the CGT AEA, capital losses can be increasingly important.
Any losses incurred during the same tax year as capital gains must be fully offset against the capital gains until the capital gains are reduced to £0. Any remaining losses can then be carried forward indefinitely to set against capital gains arising in future tax years.
Investment bonds
Investment bonds may offer a tax-efficient and administratively simple solution to trustees, where investment bonds are an appropriate investment. Investment bonds may be issued by a UK insurance company (a UK or onshore investment bond) or by an insurance company based abroad (an offshore investment bond).
The following features of investment bonds may be attractive:
Non-income-producing assets
Investment bonds are non-income producing assets – a liability to income tax will only arise if a ‘chargeable event’ is triggered. Investment bonds are also not, generally, subject to capital gains tax.
A chargeable event is triggered on an investment bond on:
- The death of the life assured which triggers payment of the death benefit
- If the bond (or bond segments) are assigned for financial consideration (for money or money’s worth)
- The maturity of the bond if it is written to a specific date
- Taking withdrawals that exceed the bond’s cumulative 5% p.a. withdrawal allowance (an ‘excess chargeable event’)
- The full and final surrender of the bond or segments within the bond.
The 5% withdrawal allowance
Investment bonds allow up to 5% of the amount invested to be withdrawn each year without incurring an immediate tax liability. Any part of this 5% allowance that is not used during a particular year can be carried forward to future years. The total available 5% allowances cannot exceed the amount invested in the bond.
At the end of each policy year, all withdrawals taken during that policy year are tested against the bond’s cumulative 5% withdrawal allowances and, as discussed above, if withdrawals taken exceed the cumulative 5% withdrawal allowances, an excess chargeable event is triggered. The excess over the cumulative 5% allowances is subject to income tax in the tax year in which the chargeable event is triggered.
When the investment bond (or segments within it) is finally surrendered, all withdrawals taken and excess chargeable event gains arising during the lifetime of the bond (or surrendered segments) are taken into account to determine the final chargeable event gain subject to income tax
The taxation of dividends inside bonds
Dividends received within the life funds held in a UK bond are not subject to tax within the fund (unlike other income arising to the fund) as the profits from which the dividend derived have already been subject to corporation tax in the hands of the dividend paying company. However, when a chargeable event gain arises on a UK investment bond, the policyholder receives a 20% income tax credit on the whole gain to reflect the tax paid within the life funds. This tax treatment makes investment bonds a tax-efficient vehicle within which to accrue dividends.
The taxation of chargeable event gains
Bare trusts
Chargeable event gains realised by the trustees of a bare trust are generally assessed against the absolute beneficiary(ies) of the trust. One exception applies where a parent has established a bare trust for a minor, unmarried child and income arising from all gifts (including the trust) made by that parent for the benefit of the minor, unmarried child exceeds £100 p.a. the parent(s) is assessed for income tax on the chargeable event gain arising from the investment bond. This rule is often referred to as the parental settlement rule.
Discretionary and other trusts
For discretionary and other trusts, the settlor(s) is generally assessed for income tax on chargeable event gains if the settlor(s) is alive and UK resident during the tax year in which the chargeable event gain arises. The settlor can benefit from top-slicing relief on the chargeable event gain.
If the settlor(s) is either non-UK resident or had died in a previous tax year, UK resident trustees are assessed on chargeable event gains at the rate applicable to trusts (45% for income in excess of the trust’s standard rate tax band (see below)) less the 20% income tax credit, so 25%, if the chargeable event gains arose within a UK investment bond.
Assignment of investment bonds
As an alternative to trustees realising a chargeable event gain, for example on surrender of an invest bond or segments within the bond, the trustees can assign the bond (or segments within it ) to a beneficiary(ies). If the beneficiary(ies) subsequently encashes the bond or bond segments, the beneficiary is then assessed to income tax on the chargeable event gain.
Assignment of bond segments allows the trustees to choose who is assessed for income tax on chargeable event gains and can often result in significantly lower, or no, tax liabilities arising if the encashing beneficiary is a basic rate income tax payer or non-taxpayer.
The taxation of income arising to a trust from 6 April 2024
Bare trusts
Generally, the bare (absolute) beneficiary of a bare trust is assessed for income tax on income arising (to that beneficiary’s share of) the trust. One exception applies where a parent has established a bare trust for a minor, unmarried child and income arising from all gifts (including the trust) made by that parent for the benefit of the minor, unmarried child exceeds £100 p.a. the parent(s) is assessed for income tax on the income. This rule is often referred to as the parental settlement rule.
Discretionary and other trusts
From 6 April 2024, the standard rate tax band is no longer available to trustees. The exemption from income tax where the only income accruing to the trust is savings income not exceeding £100 p.a. has also been removed.
From 6 April 2024, a trust that accrues total income that does not exceed £500 p.a. will have this income written down to £0 for income tax purposes. Again, this £500 limit is apportioned across all trusts created by the settlor, subject to a de minimis limit of £100 p.a. per trust.
If the trust’s income exceeds £500 p.a. from 2024-25, all income is assessable for income tax at, currently, 39.35% for dividend income and 45% for savings income and non-savings income.
It should also be remembered that trusts do not receive a personal savings allowance or dividend allowance.
Submitting tax returns
Trustees need to submit an SA900 Trust & Estate tax return by 31 October following the end of a tax year if they are submitting on a paper return or if they wish HMRC to calculate the trust’s tax liability for them. SA900 Trust & Estate tax returns can also be submitted electronically by 31 January following the end of the tax year.
If submitting the return electronically, the trustees will need to purchase software from a third party provider. HMRC does not endorse any third party providers but does provide a list of providers to allow trustees to make their own choice.
How else can Trustee Support Services help me?
We can provide a range of services to trustees and their advisers, including reports on particular aspects of a trust, including taxation, and drafting deeds and other documents, for example to add and/ or remove trustees to a trust or to remove a beneficiary etc. Please feel free to contact us to discuss your requirements – if we are not able to help you, we might just know someone else who can!
This is a summary of the taxation of trusts and does not cover all circumstances. It is based on Trustee Support Services’ understanding of taxation, legislation and HMRC practice as at 26 March 2024, all of which can change without notice.
Trustees and/ or their advisers should not rely on the contents of this blog when taking, or refraining from taking, actions that could affect the tax treatment of a trust. We accept no responsibility for any such actions which may, or may not, be taken.
