Discretionary trusts

UncleK

Absolutely!

colalba

Just to reiterate what some other have said running a discretionary trust is not easy. We have one set up by a parent's will ( on advice of lawyers and IFA).  It requires an annual tax return for income and capital gains and also IHT at 10 years and exit. The tax rate are also higher than an individual at 45% and with the allowances being only 50% of an individual.  It takes a lot of effort and certainly in our case probably not beneficial. It gets even more complicated if you pay income out to beneficiaries ( google tax pool).

I'd also say that many of the people you may need to deal with in making investments or opening bank accounts etc will have no idea what a discretionary trust is which causes complications.

UncleK

Thanks for this. I appreciate the various comments on the difficulties. If (only if) we go down this route, the intent would be to go for growth not income and my understanding is that CGT is the same inside or outside a trust. But of course, you've still got the 10 year tax.

xylophone

CGT is the same inside or outside a trust.

You have mentioned a Discretionary Trust.

https://www.gov.uk/trusts-taxes/trusts-and-capital-gains-tax

Tax-free allowance

Trustees only have to pay Capital Gains Tax if the total taxable gain is above the trust’s tax-free allowance (called the Annual Exempt Amount).

The tax-free allowance for trusts is:

• £6,150
• £12,300 if the beneficiary is vulnerable - a disabled person or a child whose parent has died

If there’s more than one beneficiary, the higher allowance may apply even if only one of them is vulnerable.

See tax-free allowances for previous years.

The tax-free allowance may be reduced if the trust’s settlor has set up more than one trust (‘settlement’) since 6 June 1978.

There’s more detailed information about Capital Gains Tax and Self Assessment for trusts.

Malthusian

UncleK said:

If (only if) we go down this route, the intent would be to go for growth not income and my understanding is that CGT is the same inside or outside a trust.

Short version of what xylophone said: it definitely isn't. As with income, the trust is taxed as if it is a additional rate taxpayer (albeit CGT has no additional rate, just higher rate - at the moment) and has a lower allowance to boot. So the usual rule of trusts applies - it is very likely to be less tax efficient than simply giving the beneficiaries the money. As with all the other tax considerations, that may just be the price you pay for not trusting the beneficiares with the money yet. (And trust the Government to make better use of your money that is paid as additional tax.)

Shedman

I meant to ask...how many trusts are you potentially looking to open?  If more than one and with the same settlor(s) then ensure that they opened on different dates (even if just a day apart) otherwise that complicates the tax treatment (for the 10 year anniversary IHT calc to do with how the Nil Rate Band is apportioned).  Its not an issue to have them opened on the same day if, say, you are settlor for one and your spouse for the other.

UncleK

It would be two, so thanks for that.

Marrad

Sorry, I am late to this discussion. Be aware that if one of your children decides to live in France, becomes a resident and pays taxes there... the French authorities hate trusts and there are potential heavy tax penalties for not making a declaration to the authorities - even if a named beneficiary has not received any money from the trust. Also, be careful who you choose to be a trustee - it can be an onerous duty if something goes wrong.

bostonerimus

I would avoid cross border trusts! I looked into the implications of having a UK resident as trustee of my US revocable trust and it gets very complicated very quickly. So the trustees are all American. I imagine it's similarly complicated for other countries. There is no issue with the beneficiaries of the trust being UK resident because it's set up just to transfer assets when I died, so no income of gains complications for them, and as soon as that is done the trust ends.