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The taxation of trusts in the United Kingdom is governed by a different set of principles to those tax laws which apply to individuals or companies.
The inheritance tax ("IHT") treatment of trusts was substantially revised by the Finance Act 2006, with effect from 22 March 2006. The possible types of trust which can now exist for inheritance tax purposes are set out in the table below:
| Name | Defining features | Tax treatment |
|---|---|---|
| Bare trust | Not a true trust: beneficiary is absolutely entitled to the income and capital. | No tax on the trustees. Beneficiary taxed in all respects as if the assets are his or her own, personally. |
| Charity | Trust for wholly charitable purposes. | Inheritance tax free. |
| Pre-existing interest-in-possession trust | The current interest-in-possession existed at 22 March 2006. | Interest-in-possession treatment (see below). |
| Pre-existing accumulation and maintenance trust | Trust was an accumulation and maintenance trust under the old rules (not explained on this page: broadly speaking, trusts for beneficiaries under 25) at 22 March 2006. | Creation no longer possible. No ten-year charges or exit charges until 6 April 2008. May already fulfil the definition of an 18-25 Trust, or may (if its terms allow) be amended to so as to fulfil that definition before 6 April 2008. If so, taxed as an 18-25 Trust from that date. If not, taxed as a relevant property trust from that date. |
| Trust for bereaved minor | Created in the will of the parent of the beneficiary concerned, who must be absolutely entitled on or before age 18. | Tax as normal on creation (can only be created by will, therefore taxed as part of the settlor's death estate). No ten-year charges or exit charges. |
| 18-25 trust | Created either by amendment to an existing accumulation and maintenance trust, or in the will of the parent of the beneficiary concerned, who must be absolutely entitled on or before age 25. | Tax as normal on creation (new ones can only be created by will, therefore taxed as part of the settlor's death estate). Trust becomes a relevant property trust (see below) upon the beneficiary attaining 18 (therefore a maximum exit charge of 7/10ths of 6% = 4.2% where the beneficiary becomes entitled at 25). |
| Immediate post-death interest | An interest-in-possession trust, created by a will and taking effect immediately upon the death. | Interest-in-possession treatment (see below). Spouse exemption available if the interest-in-possession beneficiary is a spouse or civil partner of the deceased. |
| Transitional serial interest | Various situations where a pre-existing interest-in-possession trust has terminated in favour of a new interest-in-possession. | Interest-in-possession treatment (see below). Spouse exemption available if the new interest-in-possession beneficiary is a spouse or civil partner of the previous interest-in-possession beneficiary. |
| Disabled trust | Certain trusts for the benefit of a beneficiary with a disability. | Interest-in-possession treatment (see below). |
| Relevant property trust | Any trust not falling into another category, above. Prior to March 2006 this treatment applied mainly to discretionary trusts. | Relevant property trust treatment (see below). |
Notes:
Relevant property trusts are taxed:
The interest-in-possession treatment, since 2006, applies only to some trusts with an interest-in-possession (as defined above). Where it applies, such trusts are taxed by attributing the trust's value to the beneficiary who is currently entitled to the income. Accordingly:
A trust is a three-party fiduciary relationship in which the first party, the trustor or settlor, transfers ("settles") a property upon the second party for the benefit of the third party, the beneficiary.
In common law and statutory law, a life estate is the ownership of land for the duration of a person's life. In legal terms, it is an estate in real property that ends at death when ownership of the property may revert to the original owner, or it may pass to another person. The owner of a life estate is called a "life tenant".
Taxation in the United Kingdom may involve payments to at least three different levels of government: central government, devolved governments and local government. Central government revenues come primarily from income tax, National Insurance contributions, value added tax, corporation tax and fuel duty. Local government revenues come primarily from grants from central government funds, business rates in England, Council Tax and increasingly from fees and charges such as those for on-street parking. In the fiscal year 2014–15, total government revenue was forecast to be £648 billion, or 37.7 per cent of GDP, with net taxes and National Insurance contributions standing at £606 Billion.
Estate planning is the process of anticipating and arranging, during a person's life, for the management and disposal of that person's estate during the person's life and at and after death, while minimizing gift, estate, generation skipping transfer, and income tax. Estate planning includes planning for incapacity as well as a process of reducing or eliminating uncertainties over the administration of a probate and maximizing the value of the estate by reducing taxes and other expenses. The ultimate goal of estate planning can be determined by the specific goals of the client, and may be as simple or complex as the client's needs dictate. Guardians are often designated for minor children and beneficiaries in incapacity.
A gift tax is a tax imposed on the transfer of ownership of property during the giver's life. The United States Internal Revenue Service says that a gift is "Any transfer to an individual, either directly or indirectly, where full compensation is not received in return."
In the United Kingdom, Inheritance Tax is a transfer tax. It was introduced with effect from 18 March 1986, replacing Capital Transfer Tax.
A gift, in the law of property, is the voluntary transfer of property from one person to another without full valuable consideration. In order for a gift to be legally effective, three requirements must be met:
An express trust is a trust created "in express terms, and usually in writing, as distinguished from one inferred by the law from the conduct or dealings of the parties." Property is transferred by a person to a transferee, who holds the property for the benefit of one or more persons, called beneficiaries. The trustee may distribute the property, or the income from that property, to the beneficiaries. Express trusts are frequently used in common law jurisdictions as methods of wealth preservation or enhancement.
Capital gains tax (CGT), in the context of the Australian taxation system, is a tax applied to the capital gain made on the disposal of any asset, with a number of specific exemptions, the most significant one being the family home. Rollover provisions apply to some disposals, one of the most significant of which are transfers to beneficiaries on death, so that the CGT is not a quasi estate tax.
Taxation in the Netherlands is defined by the income tax, the wage withholding tax, the value added tax and the corporate tax.
An inheritance tax is a tax paid by a person who inherits money or property of a person who has died, whereas an estate tax is a levy on the estate of a person who has died.
The U.S. generation-skipping transfer tax imposes a tax on both outright gifts and transfers in trust to or for the benefit of unrelated persons who are more than 37.5 years younger than the donor or to related persons more than one generation younger than the donor, such as grandchildren. These people are known as "skip persons." In most cases where a trust is involved, the GST tax will be imposed only if the transfer avoids incurring a gift or estate tax at each generation level.
An interest in possession trust is a trust in which at least one beneficiary has the right to receive the income generated by the trust or the right to enjoy the trust assets for the present time in another way. The beneficiary with the right to enjoy the trust property for the time being is said to have an interest in possession and is colloquially described as an income beneficiary, or the life tenant.
United States trust law is the body of law regulating the legal instrument for holding wealth known as a trust.
A charitable remainder unitrust is an irrevocable trust created under the authority of Internal Revenue Code § 664 ("Code"). This special, irrevocable trust has two primary characteristics: (1) Once established, the CRUT distributes a fixed percentage of the value of its assets to a non-charitable beneficiary ; and (2) At the expiration of a specified time, the remaining balance of the CRUTs assets are distributed to charity. The trustee determines the fair market value of the CRUT's assets at the time of contribution, and thereafter on the applicable valuation date. The fixed annuity percentage must be at least 5% and no more than 50% of the fair market value of the assets in the corpus. The remainder must be at least 10% of the fair market value of the assets contributed to the CRUT. Code Section 664(d)(1) sets the federal income tax requirements for a charitable remainder unitrust.
A Discounted Gift Trust (DGT) is a type of UK trust arrangement usually set up in connection with an investment in either an onshore or offshore investment bond. It allows the gifting of a lump sum into a trust whilst retaining a lifelong 'income' from that money, with the overarching aim of reducing the eventual IHT bill on death.
The Nil-Rate Band is a term defined and used within the tax legislation of the United Kingdom and which establishes the threshold below which some or all of the value of a gift, a death estate or assets held within a trust is subject to a zero rate of Inheritance Tax in the United Kingdom on an occasion of charge to Inheritance Tax. An occasion of charge to Inheritance Tax may not only be the death of an individual, but may also the date of a gift or of another act causing a transfer of value to occur from one person to another person, trust or entity.
The estate tax in the United States is a tax on the transfer of the estate of a deceased person. The tax applies to property that is transferred via a will or according to state laws of intestacy. Other transfers that are subject to the tax can include those made through an intestate estate or trust, or the payment of certain life insurance benefits or financial account sums to beneficiaries. The estate tax is one part of the Unified Gift and Estate Tax system in the United States. The other part of the system, the gift tax, applies to transfers of property during a person's life.
Taxation may involve payments to a minimum of two different levels of government: central government through SARS or to local government. Prior to 2001 the South African tax system was "source-based", wherein income is taxed in the country where it originates. Since January 2001, the tax system was changed to "residence-based" wherein taxpayers residing in South Africa are taxed on their income irrespective of its source. Non residents are only subject to domestic taxes.
The history of inheritance taxes in the United Kingdom has undergone significant change and mutation since their original introduction in 1694.