Trusts
19. Are trusts (or an equivalent structure) recognised in the UK?
Please describe the trust (or equivalent structure), including:
- How it is taxed.
- How its residence status is established.
Trusts are recognised in the UK. A trust is an obligation binding the trustee to deal with property in a particular way for the benefit of one or more beneficiaries. The settlor generally provides the trust assets. The settlor can also be a trustee or a beneficiary. Trustees are often professionals, but do not have to be.
A trust is not a separate legal entity but it is taxed separately from the settlor and the beneficiaries. UK-resident trustees are responsible for completing tax returns and paying tax.
Types of trust
There are various types of trust and each has its own IHT regime:
- Discretionary trust. This has the following features:
- distribution of trust income and capital is left to the discretion of the trustees;
- there is a 20% IHT charge on the value of the assets given to the trust at the outset;
- there is an IHT charge of up to 6% every ten years;
- there is an exit charge of up to 6% when assets are distributed. The applicable rate is broadly determined by the rate of tax applicable to the trust at the most recent ten-year anniversary of the trust and the length of time between distribution and the most recent ten-year anniversary;
- trust assets do not generally form part of an individual's personal taxable estate.
- Accumulation and maintenance trusts (A&M). These are a special type of discretionary trust, usually for the benefit of the settlor's children or grandchildren. A&Ms previously offered IHT advantages but are now generally taxed like discretionary trusts.
- Life interest trust. The life tenant of the trust has a right to receive trust income during his lifetime. The trustees have a discretion to pay the life tenant trust capital. After the life tenant's death, the remaining trust capital may remain in trust for other beneficiaries or it may be paid outright to beneficiaries (remaindermen). The tax treatment of the trust depends on the date of creation:
- before 22 March 2006: the trust assets are treated as part of the life tenant's taxable estate on his death;
- after 22 March 2006: the trust is taxed just like a discretionary trust and the assets do not generally form part of an individual's personal taxable estate (see above).
Resident trustees pay ICT on trust income (the rate depends on the nature of the income). Beneficiaries are taxed at their individual rate on income they receive from the trust, usually with a credit for any tax already paid by the trustees on that income.
Trustees pay CGT at 18% on gains on disposal of trust assets.
Residence of trusts
A trust is treated as UK resident if either:
- All the trustees are UK resident.
- At least one trustee is UK resident (provided that the settlor was either resident or domiciled in the UK when he made the trust).
Generally only UK-resident trusts pay ICT and CGT. However, in some circumstances the income and gains of an offshore trust may be attributed to a UK-resident settlor or to UK-resident beneficiaries and taxed as their income or gains.
20. Does the UK recognise trusts created for foreign persons that are governed by the law of another jurisdiction?
The UK has adopted the HCCH Convention on the Law Applicable to Trusts and on their Recognition 1985 and therefore recognises trusts created for foreign persons that are governed by the law of another jurisdiction.
21. What are the tax consequences of importing/exporting a trust to/from the UK?
Importing a trust
Importing a foreign trust does not in itself trigger a tax charge. However, the future ICT and CGT position of the trust changes (see below, ICT and CGT). The various ICT and CGT anti-avoidance provisions that apply to offshore trusts may continue to apply to imported trusts.
ICT and CGT. Once imported, the trustees pay ICT and CGT on all future trust income and gains. A distribution of trust capital to a UK beneficiary can give rise to an ICT or CGT charge on previously untaxed trust income or gains that arose before the trust was imported.
IHT. The trust's IHT position is unaffected.
Exporting a trust
ICT. Any trust income which arises in the tax year the trust was exported is taxable. Subsequently, no ICT is due on trust income unless it derives from UK assets.
CGT. When a trust is exported, the retiring UK trustees pay CGT on unrealised gains but not on future trust gains (even on the disposal of UK assets).
IHT. The trust's IHT position is unaffected.