Trusts Briefcase
Trusts Briefcase
The challenge
- To minimise any tax liability for the trust
- To allow payments to be made to beneficiaries
- To offer tax-efficiency for beneficiaries
- To provide investment choice and flexibility
The offshore bond solution
- Discretionary trust fund of £500,000 is invested into Portfolio Account
- Bond is written on a capital redemption basis
- No tax within the bond except withholding tax
- Withdrawals can be taken to make payments to beneficiaries
- As long as withdrawals are within the 5% tax-deferred allowance, there is no ongoing tax liability for the trust
- When the trust is wound up the bond can be assigned to a beneficiary; gains will then be taxed on the beneficiary at their own tax rate
What are the advantages?
- No annual tax charge for the trust; a UK collective would incur (from April 2010) 42.5% tax on accumulated dividends and 50% tax on accumulated interest
- 5% withdrawals with tax deferred - dividends paid out from a collective would suffer almost 64% tax - see why
- No CGT on switches between funds
- No annual tax return required - saves time and potential accountancy costs
- Capital redemption basis means the bond is not linked to anyone's life - so will not come to an end unexpectedly
- Assignment facility can increase tax-efficiency when benefits are distributed
- Open architecture - huge fund choice
- Preferential terms and annual management charge rebates on many funds
Distribution of dividends
Suppose the trust receives a dividend of £10,000, along with the accompanying tax credit of £1,111.11
- Taxable dividend income = £11,111.11
- Tax liability @ 42.5%* = £4,722.22
- Tax credit = £1,111.11
- Additional tax due = £3,611.11
*This assumes the £1,000 basic rate band has already been used.
The tax is paid by the trustees from the trust fund. They then decide to distribute the balance of the dividend, which is £6,388.89.
Discretionary income payments from trusts are treated as being net of tax at the trust rate, of 50% from April 2010. This is regardless of the origin of the income. The trust has to pay the tax; the beneficiary is then treated as having a tax credit and can reclaim any difference over his own tax rate.
- Cheque to beneficiary - £6,388.89
- Beneficiary's income grossed up - £12,777.78
- Tax due by trustees (50%) - £6,388.89
- Tax already paid - £3,611.11
- Further tax due - £2,777.78
Again, this comes from the trust fund, so the trust has paid total tax of £6,388.89 on a dividend of £10,000 - an effective rate of 63.89%.
Tools & calculators
Related links
- Find out more about Portfolio Account
- Request an appointment with your regional specialist
- Talk to our Technical Helpline on 08457 11 12 13
