Trust fund - tax

[Viggooooh]

My dad died and left money for the GC in discretionary trust with my brother and I as trustees. Looking into where to invest and how to manage and if my understanding is correct we have to pay 45% tax on any interest in the trust! Even though all the beneficiaries are under 18. Have I understood this correctly?! I just don’t understand why any solicitor would advise this. We would have been better divvying the money up ourselves and putting it in junior isa’s until they were 18.

It’s really not a huge amount of money so am reluctant to see a financial advisor as fees will also wipe out any gains.

Any advice on best way to minimise tax?

I am not an expert on this area of tax, sorry. But I do know that most solicitors and financial advisors are incredibly bad on tax - I did an internship at a tax firm ages ago, and solicitors were notorious for not having a clue/not taking tax into account when advising clients. Some of the firm’s work was just fixing solicitor/financial advisor messes.

May I suggest you write/ring up HMRC and ask them directly? They are usually very good at explaining tax rules and it won’t cost you anything. Failing that, you could get a free consultation with a financial advisor (pretend you’d give them management of the trust, book a meeting and then subtly pump them for info - and yes, I’ve done this before).

But it does sound nuts. Was there an inheritance tax break or something?

I dont think you're right, but it depends on what type of tax you are talking about & where the money is currently sitting.

If it is in an Investment Bond then the tax is 50% of what it usually is for trustees. There are other tax charges every 10 years, but that depends on encashments & valuations.

How much is in the trust & where is it....?

What I mean is that the tax charged is half of the usual figure......so 10% instead of 20%.

I have spoke to hmrc and they were the ones that advised me of the 45% tax on interest for discretionary funds. They obviously can’t advise me on where is best to invest for tax management though. It wasn’t done for inheritance tax purposes no as we were no where near that threshold. I think it may have been done as a way to ensure the money went to all GC (including future not yet born GC) as the fund is to be distributed them all when oldest turns 18.

Hadthesnip- so Investment Bonds have different tax rates for trusts? How does that work? I though it was hmrc who set tax rates? Sorry as you can see I’m a bit clueless. Trust is 50k

Sorry didn’t answer all your questions - it’s not invested anywhere yet, the estate has only just been paid out.

I think what HMRC meant was that any income of more than £1000 generated by money in a trust is taxed at 45%. On £50k that would mean an interest rate of 2%. This is for cash. If it was dividend income then the rate is 38%. If the amount received is less than 1k then the tax is a lot less.... 20% for cash & 7.5% for dividend income.

The whole point is that firstly you dont hold cash you invest it (hence my suggestion of an Investment Bond) and secondly that any investments do not generate income but get capital growth.

I think you need to speak to a financial advisor who will be able to advise the best & most tax efficient way this money is held. But suffice to say, once invested the trust wont be paying anything like 45% tax.

HTH.

You need a Chartered IFA with an AF1 qualification. This is very straightforward as you wouldn’t be investing in income generating investments. An open architecture single premium investment bond would be used. No exit or periodic charges will apply unless it exceeds the NRA

Sorry, wrote a detailed reply that went poof and now need to do some work!

This was probably initially advised for IHT reasons or perhaps to safeguard against third parties i.e. potential divorce/future marriage/ bankruptcy or to protect the beneficiaries from themselves (I.e. alcohol/drug dependacies). When weighed up, the person making the will probably thought the benefits of doing it that way outweighed pitfalls. With tax, if the beneficiaries are lower rate tax payers (I.e. wages arent taxed at the higher rate) then they can claim back the difference from HMRC.

Or perhaps they are minors

Thanks for responses. I’ve clarified with hmrc, the beneficiaries can claim tax back but only when they receive payment from the trust which won’t be for another 10/11 years. So I need to invest in capital growth not income generating.

My brother wants to invest in ns&i as he thinks it’s the lowest risk/easiest option. They have a guaranteed growth bond but max term is 3 years with a max investment of 10k per issue. Presumably after 3 years at payout we would then have to pay the tax?

Have been looking at Vanguard Lifestrategy funds. It’s available as income or accumulation. So if I go for accumulation that avoids yearly tax? And we would only have to pay at the point it pays out (when oldest GC is 18) and then we could then claim back for individuals below tax threshold?

To clarify hmrc didn’t say I need to invest in capital growth, that is what I have surmised from previous posters- thanks!

Hmm have just read up and answered my own question. Accumulation is still taxed on the ‘notional distribution’.

Now looking at investment bonds as suggested by yeahyeah and hadthesnip

Just to add, my understanding is that being a minor only matters if the trust is a 'bereaved minors' trust set up by the will of a deceased parent and registered as such with HMRC. For that, I believe (I'm not a lawyer, accountant or IFA, so please check yourself!) that income and capital gains are free of tax until the child reaches 18, at which it reverts to to 45% stated above.

I believe (I'm not a lawyer, accountant or IFA, so please check yourself!) that income and capital gains are free of tax until the child reaches 18, at which it reverts to to 45% stated above.

You believe wrong.

@Yeahyeahyeahyeeeeah

For a Bereaved Minor's Trust? That's what I operate for my children and that's what my solicitor (who set up the trust in my late wife's will) and the Accountant who does the tax return said.

If that's wrong, what is the situation?

It has to be a parent for that sort of trust to come into effect. I'm not commenting on the tax benefits as can't remember them off the top of my head as I don't tend to work with them.

It's the OP's dad, their granddad, that's settled the trust so does not qualify.

@sisyphusDad

The usual trust rates and annual exemptions apply for a bereaved minor’s trust. Whether there is tax to pay is another matter. It will depend on the actual trust and when it was formed.

@Yeahyeahyeahyeeeeah

This is why you need an expert to set things up properly, and why language is so important.

My children's trust benefits from what HMRC terms 'Vulnerable Beneficiary Relief' which, within certain constraints, effectively means that the trust does not end up paying tax whilst they are under the age of 18. That, to me, justifies my statement that income and capital gains are free of tax until the child reaches 18.

A lawyer or an accountant might quibble with my language, but the effect is as I described.

Well I would also quibble, vulnerable beneficiary rules are different. So are disability trusts for example

Just have another solicitor look at your will as Discretionary means the trust can be changed to meet your circumstances, I believe, that's why they call them discretionary they can be changed to fit with beneficiaries changing needs.

You need a STEP or CIOT qualified individual. Most legal or accountancy firms with a good private client department will have them. Income tax is paid to HMRC at rates of up to 45% but likely to be 38.1%. It stays in a 'tax pool' and gets imputed as a credit when beneficiaries receive an income. If they are nil or lower rate taxpayers they will get all or some of it back. This is without limit of time if the trust deeds allow income and capital to be paid out at discretion. If the trustees say it is income, the tax can be reclaimed.

Make your investment decision not on tax rates, but on what is best for the kids. A bit of capital appreciate would be required.

Yes, there is an initial 45% tax (38.1% for dividends) for all income above the first £1k p/a, which is taxed at basic rate. Some of the tax can be claimed back if income is paid out to beneficiaries however (quite complex, but essentially beneficiaries can claim the difference between the tax paid by the trust and their own marginal rates).

How much money are we talking about?
Does the trust already have a bank account?
In most cases, the first £6k of capital gains are tax free for a trust. But trusts are typically required to obtain an LEI (Legal Entity Identifier - there is a cost, and it must be renewed every year) in order to trade in exchange-traded securities (eg shares, bonds, investment trusts, etc).

But these are complicated matters. You can get a generic understanding of most of the points by asking strangers and by looking up stuff on the web, but you really really need to speak to (and pay for) an expert