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Tax Advice on a Discretionary Trust

Practical Issues
Gan020
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Tax Advice on a Discretionary Trust

#212636

Postby Gan020 » April 4th, 2019, 12:12 pm

My father set up a discretionary trust 20 years ago for his children and further offspring. This was originally vested with shares in an unquoted company worth about £100k. 3 years ago the shares were sold and after paying capital gains tax on the sale, the Trust assets were around £650k. I invested this in the stock market and it’s now worth £1.2m. The trust now generates £40k of dividends and will only rise from here as I de-risk at least half of the portfolio.

In three years I have gone from having a Trust holding an unquoted company assessed for tax at a value of around £100k which was generating around £5k in dividends to a Trust holding shares worth £1.2m generating £40k a year in dividends plus capital growth. It changes my financial circumstances for me and my family in a way I did not expect or plan for and I find myself requiring some expertise. I feel very out of my depth in that the sums involved have escalated far quicker than my expertise

It may help to place this in context in that I have about £1.2m of other assets excluding our house worth about £450k. (£100k instant access savings paying around 1.4%, £175k building society bonds paying around 2%, £200k corporate bonds and bond funds paying around 5%, £725k equities with a yield of around 3.5%). I am 51 and by the time I reach 55 this will all be inside a tax free wrapper of ISA or SIPP. I am having to give due consideration to inheritance tax.


Some background on discretionary trusts which may be helpful for some reading this who want to know more about discretionary trusts:
1. The first £1,000 of income is taxed at 7.5% or 20% depending on whether it is dividends or interest
2. Thereafter dividends are taxed at 38.1% and interest taxed at 45%
3. Capital gains are taxed at 20% once the nil rate band of £5,850 has been exceeded.
4. The value of the dividend and interest tax charge goes into a “tax pool”. If an income distribution is made to a beneficiary 45/55 of the value of the distribution is removed from the tax pool and is deemed to have been paid by the beneficiary as tax. An example may help. if £6,500 is paid out from the Trust as an income distribution, HMRC deems this to be £11,818 gross, £5,318 tax and £6,500 net. If you are a zero rate tax payer (typically a child) you can reclaim the £5,318 from HMRC. Likewise if you are a 20% tax payer you can reclaim some of the tax. In plain terms the rate of tax paid by beneficiaries is dependent on what income tax band they fall it, so distributing income to non-taxpayers is very efficient. (caveat – the numbers don’t work out exactly like this but it’s close enough).
5. Regrettably there is of course a downside of trusts. Every 10 years the Trust has to pay tax at 6% on assets over £350k. Reliefs may be claimed if you own AIM shares or unquoted shares (BPR).

To date the £40k in dividends is all paid out to beneficiaries who are zero rate tax payers (I am retired at age 51, my wife earns less than £1k a year and my 2 children are in education) so we receive the whole £40k more or less than free.
In a few years my wife will be earning again and my children will have finished education and be earning so any income distribution will be at a marginal rate of tax on the individual of 20%. In addition the £40k in dividends is likely to rise to £60k a year and then maybe more as I de-risk the portfolio. Further there shortly becomes a point where I do not need to take all the dividend income of the Trust so the tax pool will just increase and increase.

This seems dreadfully inefficient because tax is being paid at 38.1% which can be distributed at beneficiaries marginal rate of tax but only if the distribution takes place? Is there something clever I can do with the tax pool other than watch it grow and grow and wait for grandchildren to come along?

By extrapolation if someone had a trust with £10m assets the problem explodes (although I expect at that level all sorts of other options appear)

As you can see I’m out of my depth and intend to seek some professional advice. Before then I’m hoping any advice on here may assist me to better understand my options before I seek such advice. I currently see two options. It’s probably best to assume I’m going to continue investing in the stock market as the returns I generate it from it exceed investing in property or other assets:
1. Continue paying out income to exhaust the tax pool paying 20% tax with a view to setting up another Trust in my or my wife’s name such that I can take advantage of another £350k allowance on the 10 year charge, bearing in mind that at that point I couldn’t be a beneficiary on the second Trust.
2. Off-shore Trusts. I understand very little about these except I cannot be the trustee as it has to be someone resident in a low/no tax jurisdiction. The tax advantages look OK, but I understand nothing about the costs of running one.

Many thanks in advance

scrumpyjack
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Re: Tax Advice on a Discretionary Trust

#212651

Postby scrumpyjack » April 4th, 2019, 12:49 pm

Successive governments have raised the level of tax on trusts to try to make them very unattractive. I think they have succeeded. I think offshore trusts are a minefield at least for UK resident beneficiaries.

Also trusts can create quite a lot of friction in a family, speaking from personal experience! I have preferred the route of bare trusts for infant children/grandchildren.

One option you might consider is winding the trust up and splitting the proceeds over those you wish them to go to ultimately.

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Re: Tax Advice on a Discretionary Trust

#212658

Postby PinkDalek » April 4th, 2019, 1:10 pm

That's a very good summary of the situation and you ask plenty of pertinent questions.

I'm only an amateur on the situation but have some basic knowledge.

Questions or considerations I'd ask an adviser would include the following:

1. Are you certain the trust will benefit from the full £325,000 (not £350,000 until I missed an increase) Inheritance Tax threshold?

I ask as I've recently been looking here https://www.gov.uk/guidance/trusts-and-inheritance-tax and must confess I didn't follow what was said but the Work out the Inheritance Tax section includes the value of any transfers subject to Inheritance Tax (whether into trusts or not) that the settlor made in the 7 years before this trust was set up - use the value at the date of transfer.

I also glanced at https://assets.publishing.service.gov.u ... IHT110.pdf but at 76 pages long ...

2. Similarly are you sure you'd be able to benefit from a further £325,000 if you set up a further trust as envisaged.

3. The current 6% 10 year charge, as I'm sure you know, is charged on the relevant anniversary but the rate would be reduced should you decide it beneficial to distribute some of the capital earlier, perhaps by generation skipping if that is permitted (and acceptable to you bearing in mind the age of your children). Such that say after 6 years the rate would be 3.6% (6/10 * 6%) as an early exit charge.

4. I don't know of anything clever you can do with the tax pool. Especially as if you start to accumulate income, then it can be deemed to become capital and the benefit of the tax pool could be lost.

Probably not much help and I know nothing of Off-shore Trusts.

Dod101
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Re: Tax Advice on a Discretionary Trust

#212659

Postby Dod101 » April 4th, 2019, 1:15 pm

Apart from the emotional ties arising from the continuation of the Trust, my thought would certainly be to dissolve the trust and distribute the assets as well. Obviously the trust gets round IHT but nowadays I think that is one of the few advantages. The tax and the sheer hassle of running it made me do that with a small Discretionary Trust that my late wife set up in her Will some years ago. It may also be the case that your good fortune in investing the assets my not last!

Dod

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Re: Tax Advice on a Discretionary Trust

#212675

Postby PinkDalek » April 4th, 2019, 1:46 pm

Dod101 wrote:Obviously the trust gets round IHT but nowadays I think that is one of the few advantages.


How so?

The 10 year anniversary charge of 6% is calculated as 30% of the IHT lifetime rate of 20%. Thus, in effect, the full relevant IHT charge is paid every 33 years or so - despite the relevant property still being held in the trust.

Dod101
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Re: Tax Advice on a Discretionary Trust

#212684

Postby Dod101 » April 4th, 2019, 2:38 pm

OK PD. I was thinking of personal IHT and 33 years is rather longer than I was thinking about for a trust in any case. It was not an issue for me because we distributed the assets after about 3/4 years. The tax system applying to discretionary and possibly other trusts is obviously intended to discourage them and I can now see very little advantage to them.

I would still say to the OP that he should consider distribution of the assets and wind up the trust.

Dod

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Re: Tax Advice on a Discretionary Trust

#212716

Postby Parky » April 4th, 2019, 4:33 pm

Gan020 wrote:This seems dreadfully inefficient because tax is being paid at 38.1% which can be distributed at beneficiaries marginal rate of tax but only if the distribution takes place? Is there something clever I can do with the tax pool other than watch it grow and grow and wait for grandchildren to come along?





In order to reduce the ongoing tax, you could distribute £325000 each to yourself and your wife, and create new trusts with you and your wife as settlors. You would then have 3 trusts, each with a 7.5% income tax band of £1000 and a each with a capital gains tax exempt allowance. Of course, it would be 3 times the admin work, but would not take three times as long if all 3 trusts were similar.
As Pink Dalek said , the new £325000 settlements would only be tax-free if you have not made any Capital Transfers or Potentially Exempt Transfers in the last 7 years. You would have to pay the CGT and the exit fees on the assets that you distribute to yourselves to set up the new trusts of course, as only individuals get the £325000 allowance, not trusts.


As to whether discretionary trusts are a good idea, I think it depends on the time scale you are looking at. At your age, you may hope to live to see grandchilden and maybe great-grandchildren, and the benefit of keeping the trust assets invested over that long period could easily outweigh the IHT which might have to be paid if each generation passed on its wealth as individuals, especially if you can maintain your investment results!


I think you have a good handle on the basics of Discretionary Trusts, but if you do discover any clever wheezes for reducing tax, I hope you will pass them on to us amateur Trustees who are also struggling to keep up with the growing amount of admin needed.

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Re: Tax Advice on a Discretionary Trust

#212750

Postby PinkDalek » April 4th, 2019, 6:07 pm

Parky wrote:... You would then have 3 trusts, each with a 7.5% income tax band of £1000 and a each with a capital gains tax exempt allowance.


A small couple of points there, if I may.

Accumulation or discretionary trusts. The first £1,000 is taxed at the standard rate. If the settlor has more than one trust, this £1,000 is divided by the number of trusts they have. However, if the settlor has set up 5 or more trusts, the standard rate band for each trust is £200. from https://www.gov.uk/trusts-taxes/trusts-and-income-tax

The Annual Exempt Amount for trusts of £5,850 (rising to £6,000 in a couple of days) is split between the number of trusts established by the settlor, with a minimum of £1,170 per trust for 2018/19.

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Re: Tax Advice on a Discretionary Trust

#212756

Postby Parky » April 4th, 2019, 6:40 pm

PinkDalek wrote:
Parky wrote:... You would then have 3 trusts, each with a 7.5% income tax band of £1000 and a each with a capital gains tax exempt allowance.


A small couple of points there, if I may.

Accumulation or discretionary trusts. The first £1,000 is taxed at the standard rate. If the settlor has more than one trust, this £1,000 is divided by the number of trusts they have. However, if the settlor has set up 5 or more trusts, the standard rate band for each trust is £200. from https://www.gov.uk/trusts-taxes/trusts-and-income-tax

The Annual Exempt Amount for trusts of £5,850 (rising to £6,000 in a couple of days) is split between the number of trusts established by the settlor, with a minimum of £1,170 per trust for 2018/19.


Correct, but in this case there would be 3 separate settlors, the father, the husband and the wife.

Gan020
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Re: Tax Advice on a Discretionary Trust

#213090

Postby Gan020 » April 6th, 2019, 11:12 am

Thank you everyone for your advice. Keep it coming.

Although I had very briefly considered whether it was worth dissolving the Trust in the past I had never put any serious thought into it. Your posts have enable me to crystallise my thoughts on the matter so this has been really helpful. My thought process is now as follows:
The benefits of the trust are:
1. Ability to distribute £12k per annum of income (provided sufficient tax pool) to all children/grandchildren/great grandchildren/future unborn offspring at close to a nil effective tax rate. Also, in my situation to myself and my wife as we have little to no income other income (at least for the next 3-4 years until pensionable age)
2. Extra £5,850 capital allowance
3. Sits outside of estate for inheritance tax purposes which would save my dependents 40% of £1.2m should we both die in a car crash tomorrow.

The dis-benefits are:
1. Tax year charge at 6% on all assets over £325k (noting BPR allowances which can be very valuable )
2. Some admin which is being increasingly onerous (but tbh some of this is well overdue as I consider there are a not inconsiderable number of trusts which do not pay appropriate tax)

The argument on dissolving the Trust pre-supposes that the Trustees know which beneficiaries (some of whom may not be born) they wish to distribute the funds to and in what proportions. Further, it also pre-supposes that potential beneficiaries tax situation does not change over their lifetime. Dissolving the trust to give funds to a child paying 0% tax now may prove to not be so sensible in later years when they become a 40% taxpayer. It also brings the assets back into the scope of inheritance tax.

In my case I have decided to not to dissolve the Trust, primarily because there is sufficient money in the Trust that this may be used for my children/grandchildren and I see the benefit of keeping it invested over the long term outweighs the IHT costs. I could also make the argument that with the money in the Trust, my wife and me as trustees determine when the money is distributed. At the moment the distributions make a contribution to school and university fees, in future years I might suggest they are used for LISA’s or our grandchildren’s education. When they buy their first house the Trust could provide a lum sum to help them. I guess if you a responsible for a Trust with assets of say £50k, the administration costs would significantly move the argument far more towards dissolving the trust.

Turning to setting up two new trusts by new settlors me and my wife. The maths is easy to work out. This would potentially save £700k at 6% (£42k) plus 10 years of capital allowances at 20% (£24k), plus 30.6% on the first £1k of dividends. I’ll ignore the 30.6% part as if you are distributing to zero rate taxpayers it doesn’t make much difference but to some it may be useful. Total £66k. The incremental cost of running each trust I calculate at around £1k p.a. so £20k over 10 years plus whatever it would cost to set up. Overall this would save £40k+ over 10 years with more savings in future years so I’m definitely going to explore this. As it’s the end of the tax year I’ll speak to my accountants as part of that process as part of a wider wealth review. I’ll provide an update on this in May.


Finally a mention was made of Trusts creating friction within a family. The situation as explained in my first post you will probably not be surprised to learn is a simplification of the actual situation as I’m sure many of the posts on this Board are, in order to make it easier to explain. The trust was vested with double the unquoted shares and double the dividend stream I set out in my first post, split notionally between me and my brother. Both my father and my brother as fellow trustees starting with the expectation that the whole point of putting the money in the Trust was “not outside the scope of tax but nevertheless incredibly tax efficient”. It became regularly a case of “shoot the messenger” when I came bearing news of any tax bill from the accountants, which I found difficult as I wasn't the settler, nor was I present when the advice was given to set up the Trust.

It also become apparent from early on that my brother wished to withdraw all the funds as soon as possible including the capital and spend it on day to day living which kind of contradicted the whole point of putting it in the Trust in the first place and I don’t think was the purpose my father intended it for. The matter is now resolved as my brother has withdrawn “his half” and resigned as trustee. For anyone thinking of starting a trust I strongly recommend they fully understand the responsibilities of a trustee, its purpose and the basics of how a trust works at commencement.

Howard
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Re: Tax Advice on a Discretionary Trust

#213144

Postby Howard » April 6th, 2019, 3:32 pm

Thank you for your interesting post Gan020. I don’t want to take this thread off topic but would like to ask a question about your situation.

I’ve always had a joke that a “Trust” is set up by someone who doesn’t trust their children. So could I ask what the benefits are of setting up a trust? It is a serious question because I am also considering how to provide for children/grandchildren. I'm approximately 20 years older than you.

From observation of other people’s approaches the time to help one’s children is when they are starting out on careers and family life when money may be tight. I have a rather careful older friend who left it too late and when he offered some financial help to his son he received a frosty reply along the lines of “No thanks Dad, too late, you didn’t help me when I needed it. I’m now successful enough to spurn your offer of financial help”.

So Mrs H and I learned from that and were lucky enough to be able to offer substantial financial help early. We ignored the possibility of potential divorces etc and gave on a no strings basis. This had the advantage that significant sums were given more than seven years ago so the gifts were tax free. A non financial benefit of this action has been a very positive relationship with the partners of our children.

Moving on, we too are lucky that our investments have appreciated and we are now considering how to help our young grandchildren. This brings me back to my question about the benefits of a trust. Would this be a sensible approach?

I’m a sceptic because I knew a financial advisor who set up trusts and also the offspring of one of his clients, now deceased. My analysis was that over ten years he did very well financially but his clients’ offspring less well.

I should add that it seems pointless to us to provide direct financial help to great grandchildren who we will never know as adults. We can trust our grandchildren to do what is best at the time for their own children.

So why not just give money to grandchildren as some form of investment and let them and parents work out the best way of using this in years to come? Perhaps, given that the investments should turn out to be five or six figure sums, there may be some way of restricting the use of the funds until the grandchild becomes 21?

Presumably this could be done using ISAs as a tax efficient method. At 20k a year, these would soon mount up to a tidy sum!

Apologies Gan020 if this doesn’t directly address your question but the approach I have outlined is very tax-efficient if done early. Any comments on the alternative to setting up trusts would be welcome.

regards

Howard

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Re: Tax Advice on a Discretionary Trust

#213157

Postby Parky » April 6th, 2019, 4:38 pm

Howard wrote:Moving on, we too are lucky that our investments have appreciated and we are now considering how to help our young grandchildren. This brings me back to my question about the benefits of a trust. Would this be a sensible approach?

I’m a sceptic because I knew a financial advisor who set up trusts and also the offspring of one of his clients, now deceased. My analysis was that over ten years he did very well financially but his clients’ offspring less well.

I should add that it seems pointless to us to provide direct financial help to great grandchildren who we will never know as adults. We can trust our grandchildren to do what is best at the time for their own children.

So why not just give money to grandchildren as some form of investment and let them and parents work out the best way of using this in years to come? Perhaps, given that the investments should turn out to be five or six figure sums, there may be some way of restricting the use of the funds until the grandchild becomes 21?

Presumably this could be done using ISAs as a tax efficient method. At 20k a year, these would soon mount up to a tidy sum!





Rather than set up a discretionary trust for the grandchildren, which involves cost and admin, you could keep control of the investments by setting up bare trusts for them, which are much simpler, involve virtually no cost or admin. You can invest in shares, investment trusts etc via bare trust schemes set up by companies at no more cost than investing in those securities direct.


Advantages:- Little or no extra cost.

The income and capital gains are treated as belonging to the beneficiaries, so assuming they are non-taxpayers, and the income and capital are within their non-taxable limits, there is no tax to pay and no tax returns to be submitted - in fact no involvement with HMRC or financial advisors at all.


Possible disadvantages:- The gifts to the bare trusts are Potentially exempt Transfers, so you need to survive seven years to avoid IHT. Of course, this would also be the case with any other form of gifts.

If you have any more grandchildren, they would not have a share of the money already given away, as the beneficiaries of a bare trust have to be defined (i.e. it is not discretionary).

The beneficiaries are entitled to have access to the funds at the age of 18.

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Re: Tax Advice on a Discretionary Trust

#213167

Postby scrumpyjack » April 6th, 2019, 5:01 pm

I do agree with the principle of giving money early, when the grandchildren are infants, (assuming you don’t need it yourself!) and that bare trusts are an excellent way to do it. Of course it does depend on quantum. I have known those who have been given at an early age such large sums that they would never ever need to work. That can ruin the recipient’s lives.

Generally children do not splurge the money at 18, though I have known one or two who did. The hassle of trusts outweighs protecting the few from their own stupidity.

But I do remember my mother in law saying that once you have given it away, you have no control over what is done with it, and I have encountered instances of sons in law deeply resenting that their wives had family money (doesn’t seem to happen the other way round!).

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Re: Tax Advice on a Discretionary Trust

#213402

Postby Gan020 » April 7th, 2019, 5:22 pm

Howard wrote:Presumably this could be done using ISAs as a tax efficient method. At 20k a year, these would soon mount up to a tidy sum!
Howard


Regrettably not, as children under the age of 18 do not have a £20k ISA limit but instead have an Junior ISA limit of £4,368 p.a. which is not accessible until they turn 18. So, out a gift of say £20k, £14,632 would be inside tax. As the annual income allowance is around £12k and there’s an additional £5k savings allowance, no tax would be payable. The point of the JISA, not being accessible is a big difference between gifting and a discretionary trust. It cannot be spent on private education if that is your thing, nor could it be used to buy them a car on their 17th birthday, but would be good for University fees. Curiously this leads to an outcome that depending on the value of the gift it’s probably going to be better just gifting it to the minor inside the scope of tax if that’s the way you want to go (but then of course the parents can spend it frivolously).

I completely agree with you that money needs to be gifted earlier than later. I have also observed that if it is left very late (into 80's+) there becomes lots of talk of "the governments not getting hold of my money when I die" but very little action to stop this happening.

Your point does illustrate the impact the Chancellor is having on Trusts and the gradual drift over time. In 1997 when my father’s Trust was set up, ISAs did not exists, Junior ISA’s were introduced in 2011, LISA’s came along in 2017. Further, solicitors were running round like headless chickens in 1997 year as labour came to power and there were fears any type of wealth was going to be taxed into oblivion (could history repeat itself?) The direction of travel is that more assets can be held tax free during your lifetime but will fall inside your estate. The changes in personal IHT allowances vs trust IHT allowances further confirm the direction of travel.

Howard
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Re: Tax Advice on a Discretionary Trust

#213414

Postby Howard » April 7th, 2019, 6:36 pm

Gan020 wrote:
Howard wrote:Presumably this could be done using ISAs as a tax efficient method. At 20k a year, these would soon mount up to a tidy sum!
Howard


Regrettably not, as children under the age of 18 do not have a £20k ISA limit but instead have an Junior ISA limit of £4,368 p.a. which is not accessible until they turn 18. So, out a gift of say £20k, £14,632 would be inside tax. As the annual income allowance is around £12k and there’s an additional £5k savings allowance, no tax would be payable. The point of the JISA, not being accessible is a big difference between gifting and a discretionary trust. It cannot be spent on private education if that is your thing, nor could it be used to buy them a car on their 17th birthday, but would be good for University fees. Curiously this leads to an outcome that depending on the value of the gift it’s probably going to be better just gifting it to the minor inside the scope of tax if that’s the way you want to go (but then of course the parents can spend it frivolously).

I completely agree with you that money needs to be gifted earlier than later. I have also observed that if it is left very late (into 80's+) there becomes lots of talk of "the governments not getting hold of my money when I die" but very little action to stop this happening.

Your point does illustrate the impact the Chancellor is having on Trusts and the gradual drift over time. In 1997 when my father’s Trust was set up, ISAs did not exists, Junior ISA’s were introduced in 2011, LISA’s came along in 2017. Further, solicitors were running round like headless chickens in 1997 year as labour came to power and there were fears any type of wealth was going to be taxed into oblivion (could history repeat itself?) The direction of travel is that more assets can be held tax free during your lifetime but will fall inside your estate. The changes in personal IHT allowances vs trust IHT allowances further confirm the direction of travel.


Many thanks for your comments. Some helpful issues to think about.

regards

Howard

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Re: Tax Advice on a Discretionary Trust

#218540

Postby Kantwebefriends » April 30th, 2019, 8:01 pm

There is a way - the name escapes me - by which the stockbroker can be instructed to have the shares pay dividends direct to beneficiaries. Then that flow of income never enters the trust and is taxed as dividend income directly on the beneficiaries.

Got it! It's setting up a "revocable life interest", or rather several of them.


Would that simplify your life as a Trustee? Would it save tax too? Or are you doing this already?

If eventually your wife or children find the income in danger of paying 40% tax they could just feed a pension. Or invest in VCTs. Or whatever is the tax avoidance stunt du jour.

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Re: Tax Advice on a Discretionary Trust

#229719

Postby Gan020 » June 15th, 2019, 2:10 pm

I said I’d come back on this in a couple of months. I’ll start with my questions first and provide the commentary below. Many thanks in advance for any help anyone is able to offer.

1. Can anyone provdie a recommendations for an accountant within 50 miles of Wolverhampton who understands discretionary trusts with £1.2m of assets in mostly quoted companies
2. How do I work out exit charges from the Discretionary Trust for capital distributions?
3. Is it accountants or solicitors work out the 10 year charge on discretionary trusts?
4. I have been advised that if I distribute funds from my father’s discretionary trust to open 2 new trusts in my and my wife’s name this will be seen as a linked transaction by HMRC and therefore of no value. How do I unlink the transaction?
5. I read somewhere that the life of a discretionary trust is 80 years. It would be helpful to know
6. Is it normal that my father’s discretionary has powers to make distributions to anyone? (the text seems to say it is for the benefit of his offspring and their further offspring etc. but the trustees by agreement can choose to change this)


Regrettably I have made little progress overall with my objectives as it seems either I’m talking to the wrong people, perhaps it’s my personal circumstances or the level of expertise available as the government have made discretionary trusts less attractive has dwindled over the years.

In particular I get the impression that discretionary trusts have been mostly used by the settlor for shares in their unquoted business. As unquoted shares qualify for BPR, there’s not much for anyone to do except deal with a dividend stream or crystallisation of the unquoted shares on a sale. Since the unquoted shares qualify for BPR the ten year tax charge will be zero or close to zero and therefore there’s not much tax work to do.

Thus my questions with a bit more information.
1. Recommendation for an accountant. I’m looking for a firm that has clients with similar or larger assets in the Trust. Someone with some experience. What I’m not looking for is an accountant who does half a dozen of these a year and when they need help phone the organisation they are affiliated too. Ideally I’d like someone who once a year when I send off the information for the annual tax return will spend 10 minutes looking at the numbers and will suggest things I need to think about. Someone who is looking to generate additional income for the firm by advising me how to save money.

2. I began to wonder whether one of the solutions to tax mitigation is simply to spend some of it enjoying life, give more of it away now, fill up my wife’s pension more (so I pay an exit charge but then I get 25% back for voluntary contributions to her SIPP and it sits outside of her estate until she’s 75), fill up the kids LISAs (again exit charges but 25% back from the government), fill up the kids ISAs at £20k each a year for a few years (I was probably going to give them £50k towards their first house at some point in the future anyway), indeed fill up my and my wife’s ISA’s as although this will bring it into our estate, it would avoid 20% capital gains on any capital appreciation and all interest and dividends would also be tax free. I can see that over a 20 year period the tax saved would outweigh the 40% IHT on death and the 6% 10 year charge (I need to work this out exactly on a spreadsheet) and that’s assuming I do nothing further to mitigate it – i.e. give it away. Indeed perhaps also run down some of the Trust when I get to 55 by not taking my pension until later. So, how do I work out the exit charges if they are from capital as this seems to be the critical thing I need to know to move this on.

3. So, this is where I started banging my head against a brick wall. The two times the Trust has done the 10 year charge this has been done by my accountants. The calculation involves valuing the assets (quarter up calculation), what the BPR reliefs are and any adjustments for conversation of income to capital and I’m being advised by one of the accountants I contacted that this is normally done by solicitors as they as more expert in inheritance tax. Now this really surprised me and didn’t seem right but then I thought maybe this is the reason I’m getting so little help from my existing accountants and maybe I’m talking to the wrong people.

4. This was a 5 minute conversation via an IFA who was happy to help me along a bit and I am deciding whether to move this to a formal paid arrangement for advice. At this point the IFA is not very aware of my personal circumstances so it wasn't ideal for him to give advice. I am sure (lol) there must be a way to unlink it either by me funding the Trust with £325k before the distribution is made by my father’s Trust (would be problematic as I’d have to cash in all my ISAs) or by leaving a suitable, say 3 year gap between the transactions. I haven't pressed the IFA on this as it was just a chat rather than paid advice. I was advised I could set up an Absolute Trust without the linking problem and this of course does not have the 10 year charge but in my circumstances this doesn’t seem worthwhile. If I’m going to do that I might as well just give the money away to my children and in any event I would lose the benefit on being able to make revenue distributions at close to zero tax to my grandchildren

5. AIM shares count for BPR. However, that’s not where I make my money on shares. AIM doesn’t suit my trading style and I tend to keep away from it as historically I’ve lost money. I’d rather make more money and pay more tax than have too much AIM. I’m reviewing my attitude to this but I know many find this a very useful tax relief for inheritance tax purposes.

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Re: Tax Advice on a Discretionary Trust

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Postby helfordpirate » June 15th, 2019, 3:59 pm

I used to be a trustee of a discretionary trust somewhat smaller than yours but also invested in shares/funds. I was the settlor and my wife and were trustees. We faced some of the same quandries. Initially we capitalised all the income in the trust accounts (and so built up a large tax pool). when the children reached 18, we stopped capitalising it and accumulated it as "income on account". (How much you can do this is a bit of a grey area and you need to check that the trust deeds give you the right powers). When we were comfortable and when the children were 0% tax payers, we started distributing regular income made up of the current tax year income plus some of the income held on account (and not capitalised). We ran down the tax pool as much as we could - we didn't quite get to 0. Then finally we decided to distribute the capital and used holdover relief to minimise capital gains as best we could.

On the exit charge... its something like.. you couldn't make this stuff up!

First work out the sum of the value of trust relevant property at the last periodic charge, the initial value of any related settlements and the initial value of any non relevant property. Then subtract the current nil-rate band less any chargeable transfers made in the 7 years prior to the trust plus any capital distributions in the last 10 year period. This gives you the total chargeable value of the trust. Then apply the 20% lifetime tax rate. Then calculate the effective tax rate by dividing this number by the first sum you calculated and then take 30% of it. (This is the effective tax rate and you will have calculated this at the last periodic charge but using the nil-rate band at that time.) Then take the transfer to the beneficiary and gross it up by this tax rate i.e. multiply by 1/(1-tax rate), then apply the tax rate to that to give the IHT chargeable on gross transfer, then adjust by multiplying by the number of quarters since last periodic charge divided by 40.

So if you did a 10 year periodic charge you will have calculated an effective tax rate and assuming the nil-rate band was the same, you just use that adjusted by the number of quarters since the last charge.

Or get an answer to Question 1.

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Re: Tax Advice on a Discretionary Trust

#230091

Postby Parky » June 17th, 2019, 9:54 am

Gan020 wrote:5. I read somewhere that the life of a discretionary trust is 80 years. It would be helpful to know
6. Is it normal that my father’s discretionary has powers to make distributions to anyone? (the text seems to say it is for the benefit of his offspring and their further offspring etc. but the trustees by agreement can choose to change this)





5. The Trust Period for the discretionary trust for which I am a Trustee is 125 years.

6. The Trustees have the power to appoint additional beneficiaries.


I gather that these are normal practice (date of deed was 2013).


I have similar concerns to the OP in many respects, albeit with much smaller sums involved. One thing I am seriously considering is to convert the Trust to an Interest in Possession trust, which can be done by a simple deed. All dividend income is taxed at 7.5% in this kind of trust. Furthermore, if the income is paid directly to beneficiaries it does not need to be declared on the Trust SA900 form.In fact, there is no need to submit an SA900 if there are no chargeable capital gains. The income has to be declared by the beneficiaries, but if they are non-taxpayers (grandchildren in my case), no tax at all is paid on the income (if they do not exceed their personal allowance). This avoids both tax and administration.


I have found the book Trusts and Estates, by Iris Wunschmann-Lyall and Chris Erwood, from the Core Tax Annuals invaluable in dealing with Trust matters. It is a dense read, and expensive, but covers most of your technical questions in detail, with example calculations. Cheap second-hand copies from previous years are usually available on Amazon. Mine from 2010/11 still seems more or less up-to date.


If you find a source of expertise in the West Midlands I would be interested to know - I am also in that area.

Parky.

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Re: Tax Advice on a Discretionary Trust

#230107

Postby Gan020 » June 17th, 2019, 11:10 am

Thank your for your replies. I have already ordered the book, the 2017/18 version was avaialable for less than £40 delivered off Amazon and I consider that a bargain compared with the tax I might save or even just sleeping easy knowing I am doing the right things.

More than anything I'm hoping the book will help me have a more productive conversation in progressing this. Also, there's nothing like reading something yourself and being sure.


With regard to the accumulating income and the tax pool, the tax pool currenty stands close to zero although at times the income did accumulate. I now start to approach a time when this will become an issue too as my family has grown up and grandchildren don't seem likely for another 10 years and to empty the tax pool would require the beneficiaries to pay 20% on some of it. Further I am becoming more risk adverse as I get older and tending more to stocks and bonds which provide a steady income stream.

Over the last few days I have returned again and again to how I feel about taking the capital out of the Trust, stick it in an ISA and pay no tax. It would be in my estate (or my children's estate) for IHT of course. This would take a good number of years of course but at four lots of £20k for me, my wife and children it would look very different in 5 years time. (Unless I make 10% a year in which case I'll be approximately paying out as much as the Trust is growing but hey I'd call that a result!)

Finaly I perceive there is something very clever going on with government tax policy both with SIPP's and ISA's to make tax minimisation vehicles far less worthwhile.

The interest in possession trust sounds interesting. I shall look at it closely when the book arrives.


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