Trusts are liable to income tax on income and CGT on gains for each tax year. The trustees are responsible for filing self-assessment tax returns by the normal date (31 January 2016 for 2014/15) and paying the tax on the normal dates (payments on account of income tax on 31 January and 31 July 2015, and the balance of income tax and the whole of the CGT on 31 January 2016).
The tax rates applicable to trusts are:
|Rate on dividend income||10%||37.5%|
|Rate on other income||20%||45%|
|Rate on capital gains||28%||28%|
|CGT annual exemption||£5,500||£5,500|
*Discretionary trusts pay tax at the lower rates on income up to £1,000.
Discretionary trusts for vulnerable beneficiaries (such as disabled people) may reduce their effective tax rates if an election is made.
Beneficiaries of life interest trusts are treated as entitled to the income of the trustees, and pay tax on it in the year it arises to the trust, with a credit for tax paid by the trustees. Beneficiaries of discretionary trusts pay tax on income distributed to them by the trustees, which is treated as paid with a tax credit of 9/11 of the cash received. If the tax credit on either type of trust exceeds the beneficiary’s tax liability, the excess can normally be reclaimed by the beneficiary (unless credits on dividends in a life interest trust).
The CGT annual exemption is divided between trusts established by the same settlor since 6.6.1978, to a minimum of £1,100.
Trustees are also liable to pay inheritance tax in a variety of circumstances, and they should make sure that they have appropriate professional advice to enable them to fulfil all their legal and fiscal responsibilities in what is a very complex area of taxation.