The Lemon Fool

Hi,

I'm trying to help my wife with her tax position on her discretionary Trust but I'm struggling to understand despite a background in accountancy.

The Trust was set up in 2017 with an amount of £100k. My wife is a trustee and the sole beneficiary. The £100k is invested in a balanced onshore bond (equivalent to a 60/40 portfolio).

As 5% per year is withdrawable out of the trust, she has withdrawn £4k per year for the previous 5 years, and placed that into a stocks and shares LISA.

She registered her trust with HMRC and they are asking for a tax return for the previous financial year. My question is how to calculate the tax and when it's payable?

If tax is due on the trust, would it make sense to reduce the risk/return within the trust and use the LISA for the risk/equity play to reduce the tax liability?

We'd appreciate any help with this.

Many Thanks

moneybagz wrote:Hi,

I'm trying to help my wife with her tax position on her discretionary Trust but I'm struggling to understand despite a background in accountancy.

The Trust was set up in 2017 with an amount of £100k. My wife is a trustee and the sole beneficiary. The £100k is invested in a balanced onshore bond (equivalent to a 60/40 portfolio).
...

Many Thanks

Who is the settlor, and are they alive?

her mother (still alive) is the settlor and other trustee

moneybagz wrote:her mother (still alive) is the settlor and other trustee

Then it is my belief that the gains are taxable on your mother in law as if it were her income ( so top-slicing etc ) , with an obligation on the trust to refund her if she asks.

Not legislation , but see 3.1 here - https://www.gov.uk/government/publicati ... 20policies.

thanks for you help, looks like I'll be delving deeper

From what I can gather, it would make sense to take the maximum 5% tax deferred allowance each year for 20 years, investing in LISA's until the age of 50 (to gain an extra £1k per year), with the remaining years invested in ISA's. As a result there will be no chargeable gain on which to pay tax each year.

Upon full surrender, as the trust is invested in an onshore bond, the life company will have already paid the 20% corporation tax on the funds so this 20% tax credit will satisfy the liability for a basic rate taxpayer and as you say top slicing relief can be used if this pushes my wife's income into the higher tax bracket.

Does this sound correct?

Thanks

moneybagz wrote:From what I can gather, it would make sense to take the maximum 5% tax deferred allowance each year for 20 years, investing in LISA's until the age of 50 (to gain an extra £1k per year), with the remaining years invested in ISA's. As a result there will be no chargeable gain on which to pay tax each year.

Upon full surrender, as the trust is invested in an onshore bond, the life company will have already paid the 20% corporation tax on the funds so this 20% tax credit will satisfy the liability for a basic rate taxpayer and as you say top slicing relief can be used if this pushes my wife's income into the higher tax bracket.

Does this sound correct?

Thanks

Nearly almost. Crudely, is your MiL going to be with us in 20 years? Once she is gone, the trust is taxable, effectively at 25%, on the chargeable events. Not your wife. So no top slicing after MiL leaves the scene. Is there a compelling reason to maintain the discretionary trust? What is it achieving ?

Thanks for the reply, my wife just mentioned the extra 25%, so I think we finally understand (with your help) the tax situation. There is no reason to hold the trust, and as my wife says it's one big headache, unnecessarily expensive, and tax inefficient.

moneybagz wrote:Thanks for the reply, my wife just mentioned the extra 25%, so I think we finally understand (with your help) the tax situation. There is no reason to hold the trust, and as my wife says it's one big headache, unnecessarily expensive, and tax inefficient.

Then just appoint the policy/policies to your wife and she'll get top-slicing as if she had held it/them from inception.

genou wrote:

moneybagz wrote:From what I can gather, it would make sense to take the maximum 5% tax deferred allowance each year for 20 years, investing in LISA's until the age of 50 (to gain an extra £1k per year), with the remaining years invested in ISA's. As a result there will be no chargeable gain on which to pay tax each year.

Upon full surrender, as the trust is invested in an onshore bond, the life company will have already paid the 20% corporation tax on the funds so this 20% tax credit will satisfy the liability for a basic rate taxpayer and as you say top slicing relief can be used if this pushes my wife's income into the higher tax bracket.

Does this sound correct?

Thanks

Nearly almost. Crudely, is your MiL going to be with us in 20 years? Once she is gone, the trust is taxable, effectively at 25%, on the chargeable events. Not your wife. So no top slicing after MiL leaves the scene. Is there a compelling reason to maintain the discretionary trust? What is it achieving ?

That would have been my question but I felt it was not relevant to the question being asked. Furthermore, I would have thought that the taxation of the trust and/or the settlor and/or the beneficiary would all have been matters that would have been well documented when the trust was set up. With respect, the trust is not holding a huge amount of money and I doubt very much that certainly from a financial point of view it is worth the hassle. There may be other considerations of course.

Dod

In my long experience, trusts (other than bare trusts) are to be avoided if at all possible. They have increasingly become taxed so much that it is generally disadvantageous to use them Both conservative and labour governments have really screwed down on them. About the only exception, IMO, are trusts for disabled persons. Still my brother, who is a solicitor still uses them, but being a solicitor I suppose he would!

Thanks for all the replies, much appreciated. Unfortunately, I think she's stuck with the trust now. Her mother still wants the trust left in place, despite the increasing tax liability. There are no reasons whatsoever for having the trust other than control, but that could have been achieved by her mother keeping the money in the first place. Frustratingly, the only people who have benefitted from the trust are the solicitors, financial advisors, and the tax man.

moneybagz wrote:Thanks for all the replies, much appreciated. Unfortunately, I think she's stuck with the trust now. Her mother still wants the trust left in place, despite the increasing tax liability. There are no reasons whatsoever for having the trust other than control, but that could have been achieved by her mother keeping the money in the first place. Frustratingly, the only people who have benefitted from the trust are the solicitors, financial advisors, and the tax man.

That is of course a problem. The ‘donor’ does not really want to be a donor and wants control to stay with her. Guess your wife will not change that and will just need to be content with what she has got. A lesson there for all of us.

Dod