Updated: Mar 9, 2020
Many people do not realise that Trusts are subject to Income Tax and Capital Gains Tax in the same way as an individual would be. Albeit, there are variations between the rules and rates applicable to individuals versus those applicable to trusts and so we explore these here.
Income Tax Rules
Trustees are not treated as 'individuals' in the context of tax legislation and are seen as a single and continuing body of persons. This means that they will not usually be entitled to a personal allowance in their capacity as Trustee.
It is, however, possible for a beneficiary to utilise their personal allowance such as in a case where there is a right to income (i.e. Interest in Possession). The Trust income can be paid directly to the beneficiary who is then responsible for declaring the income on their personal Tax Return and paying any tax due. This can often make the Trust Tax Return more straightforward for the Trustees too, as they will not have to account for that income paid to the beneficiary.
Income Tax Rates
Different rules and rates of Income Tax apply to different types of Trusts and so a Trustee much ensure that they establish the type of trust, otherwise this could lead to incorrect income tax calculations. These rates are different to those applicable to individuals.
From 6th April 2016, almost all income (including income from properties, dividends and bank interest) will be paid gross.
The standard rate (Trust income up to £1,000) applicable to Accumulation; and Discretionary Trusts is 7.5% for Dividends and 20% for all other income. Anything over the standard rate is 38.1% Dividend Income and 45% for all other income. Interest in Possession Trusts are taxed at the Standard Rate, i.e. 7.5% on Dividend income and 20% on all other income.
Capital Gains Tax Rules
Trusts are assessed for Capital Gains Tax when an asset, such as Stocks and Shares or Land and Property is sold at a gain. It is calculated on the difference between the sale value and the costs of acquiring and disposing of the asset, which can include improvement costs.
Trusts are entitled to an Annual Exemption Amount, which exempts part of the taxable gain and is 50% of the Annual Exemption Amount individuals are entitled to. If there is more than one Trust, then the Annual Exemption Amount is subdivided across each of the Trusts to a minimum of 10% of the individual rate.
There are several different reliefs available that trustees may be able to use to reduce the trust’s Capital Gains Tax, such as Principal Private Residence (PPR) relief, Entrepreneur's Relief, Investor's Relief as well as Holdover Relief.
Capital Gains Tax Rates
The rate of Capital Gains Tax has varied considerably over the years and the latest rates are as a result of the Government's attack on 'buy to let' investments. For 2019 to 2020 tax year, the current rate of Capital Gains Tax for trustees is 20% (not including residential property) and 28% for trustees for disposals of residential property.
The tax treatment of Trusts can be complex and so you may find comfort in talking to a professional for advice. We can be contacted here.