Taxation and trust registration for discretionary trust

itwasntme001

A parent had a life insurance claim paid out. It was placed in a discretionary trust when the policy was taken out. The claim money was sent to a trustee and subsequently paid out to 2 beneficiaries (one trustee and another non-trustee).

There was interest added when Aviva paid the claim money due to accrued interest from when claim started to money being paid out. I understand that this interest was generated inside the trust and therefore there is a trust tax liability (interest is more than the £500 tax free allowance) and this means that the trust needs to be registered (even though it does not exist anymore given money paid out).

My questions are:

• is the above understanding correct?
• can i fill in the relevant forms as a trustee to file the tax return for the trust and to also register the trust online?
• since the interest accrued falls over two tax years, is the interest treated on an accrual basis or cash basis for trust taxation?
• since the trust taxation is 45% on income, there would effectively be a tax of 45% on the excess over the £500 threshold payable? And this amount can be treated as a tax credit for the beneficiaries for their personal tax? How does this work exactly?

TIA.

poblomov

The Trust should have been registered on the Trust Registration Service a few years ago.

If it was (and I would have thought Aviva would have wanted proof it was before paying out), you need to change it from a non-taxable trust to a taxable trust on the Trust Registration Service to get a Unique Tax Reference that you can submit a Tax Return under.

The interest will be taxable in the year it was actually received.

If the interest is over £500, tax will be due at 45% on the whole amount if was received in a tax year beginning on or after 6 April 2024 (and assuming no Trust Management Expenses properly chargeable to income). For tax years prior to that there was a standard-rate band for Discretionary Trusts of £1,000

Trustee would fill out an R185 for each beneficiary giving figures for their share of the after tax income and the associated tax credit.

The beneficiary then puts those figures on the Trust and Estate supplementary pages, if they are in Self Assessment, or on Form R40 with the rest of their income if they aren't. Assuming their total income is below £100,000, the tax due on it in their hands would be less than the tax credit. It would be classed as non-savings income in their hands so any Personal Savings Allowance wouldn't be able to apply to it.

itwasntme001

When the policy was taken out we looked into trust registration and found out that it does not need to be registered because life insurance policies are in the excluded list. I think because the policy had nil surrender value.

I understand it does need to be registered now because of the tax liability that has arisen.

poblomov

https://forums.moneysavingexpert.com/discussion/comment/82008337#Comment_82008337

Yes, you're right so you'll just register it as a taxable trust.

itwasntme001

One potential complication and question I have:

Half of the policy money, including the accrued GROSS interest, was paid to a beneficiary into their bare trust account (as that beneficiary is a minor). the other beneficiary (me) was paid the other half.

The tax due would be for the 26/27 tax year, so the policy trust trustee would need to pay the 45% tax. But this would presumably need to be withdrawn from the beneficiaries bare trust account for their half, at the time of paying the tax? And then when doing the tax return for the bare trust account, the tax credit claimed so HMRC credits the account later on?

Is the above correct? Or should I withdraw the 45% of (half the) interest from the bare trust account now in advance of the tax due?

poseidon1

If you were familiar with the practicalities of administering discretionary trusts, you would as trustee have withheld the interest element of the insurance payout rather than distributed the entire amount pursuant to the Deed of Appointment, discussed in your last post.

Since you evidently did not do this, then yes the tax will have to be met from the distributed funds, and if you wish to promptly recoup tax overpaid for the bare trust then an R40 tax refund claim needs to be made on behalf of the beneficiary, whilst in your case self assessment form SA100 together with SA107 will eventually be required for 2026/27 tax year to determine what if any refund you are personally entitled.

R40 claim form below:

https://assets.publishing.service.gov.uk/media/678fc1a26b8b7d3e01328b2b/R40M.pdf

itwasntme001

Is there anything preventing the decision to pay the full interest to the bare trust child beneficiary together with their half of the capital (and the other beneficiary - me - only get the other half of the capital)?

The settlor/appointer agrees to this. There isn't anything in the policy trust deed to prevent this from what I can see. Appointer effectively has full discretion how to distribute the capital and income generated by the trust (and part 6 of the policy deed suggests that trustees have power to distribute interest to whoever…).

So if there really is nothing to prevent this, it would help solve two issues:

• a full tax refund will be achieved by the bare trust beneficiary given sufficient personal allowance (i.e. 0% marginal tax rate) compared to having to pay some tax on the interest otherwise
• no need to reclaim the tax part of the bare trust payment anymore; the trustee (me - also the other beneficiary as well) simply pays into it instead the remaining amount to make up the full net of tax (not gross) interest

Thoughts?

poseidon1

You say the trust no longer exsists so presumably a Deed of Appointment was executed to that effect, as discussed in your previous post.

If so the distribution of the trust fund will be as directed by the deed and therefore set in stone.

I note I did warn you of the possibilty of interest on the policy proceeds and the 45% tax due thereon. Would have made sense to have planned for this possibility, prior to executing the deed terminating the trust.

Yorkie1

https://forums.moneysavingexpert.com/discussion/comment/82009193#Comment_82009193

I may have misunderstood, but if you are suggesting that you place the wrong date on a document in order to achieve a different financial outcome, that would be illegal and couldn't be supported by this forum.

But as I say, i may not have understood you correcty.

itwasntme001

https://forums.moneysavingexpert.com/discussion/comment/82009845#Comment_82009845

How is it illegal when this document wont even be seen by anyone?

Yorkie1

A deed of appointment is a legal document, which is signed and dated. To backdate it to an inaccurate date so that distributions take place differently than they would otherwise have done, is getting into false instrument offences under the Forgery and Counterfeiting Act 1981.