Ahhh Trust Tax Return

[Tauriel1]

If anybody can help I would be so grateful.

My DC has a trust fund which is made up of a death in service payment from a relative. The Settlor is the employment pension company of the person who died.

I am a trustee with another relative. DC is the only one who can benefit, but money held in trust until 18 so we can withdraw for DC benefit if we keep receipts, both agree etc. This is the first year any money has been withdrawn for DC's expenses. Do payments out of trust paid to trustees for the child need to be recorded?

There is no box that fits what I need exactly. The closest says have any discretionary payments of income been made to beneficiaries? but in the notes it states income is interest, money made etc.

Is money withdrawn for things like holidays, clothing not recorded as it my DC's money? So confused.

Thanks if anyone understands/has any idea what I'm going on about.

Your first step is to figure out what kind of trust it is - is it a discretionary trust (I.e. Do the trustees have absolute say over what happens to both income and capital of the trust) or interest in possession trust (I.e. The income belongs to the beneficiary but he cannot touch the capital, only the trustees can use the capital). If it was a parent who left the money the trust could also be a special type of trust for vulnerable beneficiaries.

Your next step is to establish whether the capital or the income of the trust was used for these payments. This will dictate what (if anything) you need to report.

The treatment can be different depending on the facts as above so I'm not going to give you all options here but if you need further help let me know the answers to these two questions, either here or in PM and I'll try to help you.

thank you so much

I believe it is a discretionary trust, which will be payable to the beneficiary at 18. However, it was a parent who died so not sure. I was always told I had to declare the tax on the interest as the account we use isn't taxed at source. This is the first year the money has been used for anything which is why I'm getting mixed up. The pension scheme describe it as 'a trust for minors' but HMRC say it is taxable as the trustees are in control until beneficiary is 18.

It is very complicated and the deed of trust is quite specific to us, so I probably do need a solicitor/tax advisor to have a look this year.

Just looked at the deed. The clauses are that the beneficiary/ my DC is entitled to the capital and income of the trust at 18. This is held by the trustees to be used in the interest of the beneficiary, where both trustees are in agreement.

The account it's held in is (name of trustees) as trustees of (name of beneficiary)

If it was a parent who left the money and certain conditions are met (see HMRC's explanation here). These rules only apply if a vulnerable beneficiary election has been made, although you have time to make it if it proves beneficial.

If it's just a discretionary trust then the tax treatment depends on whether the cash you've used is capital or income. Which is more beneficial depends on how much income tax the trust has already paid, how large was the total amount of money in the trust and, obviously, on facts. So if the inheritance was all invested in shares and there's a bank account into which a dividend is paid, then - if you're using the cash in that account - it's hard to claim that you've used the capital of the trust. I hope that makes sense.

This is a long-winded way of saying that you may need professional help. Make sure it's someone who is familiar with the taxation of trusts. My experience is that solicitors aren't always the best at that and not all accountants/tax advisers want to deal with trusts.

Thank you. I finally got through to them today.

The money is just in an Investment account. The original amount in there is thousands more than the income, which is only the interest on the capital (and within the standard band rate)

Because the capital was already there, I'm going to not declare the nominal amount that was withdrawn.The advisor on the phone said that is fine if I view it as from the capital.

What a head ache. Thank you for your advice, I understand it a lot more now. I think it probably applies more if you have stocks, shares etc making a good income. My DC's is literally just sat there earning below 1 percent interest at the minute.

Yeah, if you've got minimal income and no IHT concerns (that is the capital is not above £325,000) then distribution of capital is the way to go. Whether you'd need to prepare the IHT100 forms depends on whether the trust capital was more than £260k when it started. (This is slightly simplified but in most cases the figures above are accurate)

Thanks again. Capital is way below that. I don't know why but I tie myself in nots over this kind of thing.

You have explained things to me much bettet than HMRC and the trust document.

Thanks so much again

*knots

No problem. Glad I could help. Trust documents are... Challenging, to say the least. It took me years of practice before I figured out how to read them.