View the related Tax Guidance about Bare trust
Bare trusts — IHT
Bare trusts - IHTWhat is a bare trust?The term 'bare trust' applies to an arrangement where the legal ownership of property is in a different name from that of the person beneficially entitled to it. The person entitled to it has absolute rights to both capital and income, but the legal owner will conduct the management of it. Some of the situations in which a bare trust might arise are described below.Assets held for childrenMinors do not have the legal capacity to enter into an enforceable contract or give a valid receipt. Property which, in equity, belongs to a child must be held in the name of a trustee. Whilst the child is under 18, the trustee, usually a parent or guardian, manages the property according to their own judgment, even though it belongs absolutely to the child. But if the child's rights to the property are not subject to a legal restriction, other than their incapacity as a minor, the child has the right to take possession of the property at the age of 18 and deal with it as he wishes. This situation will arise where children are given outright gifts in a Will, not subject to an age contingency. It is also very common with children's savings accounts funded by grandparents and other relatives. Parents may set aside funds for children in a bare trust to obtain a legal
Bare trusts ― income tax and CGT
Bare trusts ― income tax and CGTThis guidance note explains how trustees of bare trusts are treated for income tax and capital gains purposes. Although a bare trust is, in equity, a type of trust, for both income tax and capital gains tax purposes its existence is transparent. This means that no tax liability falls on the trustees in respect of their income and chargeable gains. Rather, the two tax regimes target and tax the beneficiary of such a trust at the beneficiary’s rates of tax.Income taxAlthough the income tax regime provides that bare trusts are not subject to the rules that apply to other types of trust, it does not explicitly say how to treat the income arising from property held in a bare trust. The following rules are established by case law:•any income arising to a bare trustee is assessable on the beneficiary as he is absolutely entitled to that income•the beneficiary must declare any income on his personal tax return•although the bare trustee may pay income tax on behalf of a beneficiary, it is the beneficiary who is chargeable to tax•any expenditure incurred by the bare trustee is not deductible by the beneficiary in computing his income tax liabilityCIR v McIntosh 36 TC 334; Hamilton-Russell’s Executors v CIR 25 TC 200; TSEM8405See Example 1.Capital gains taxIn contrast to the income tax regime, the capital gains tax legislation sets out the treatment of chargeable gains arising from the disposal of property held by
Overseas pension schemes ― taxable events
Overseas pension schemes ― taxable eventsSTOP PRESS: This guidance note may be affected by the changes to the taxation of pensions made by FA 2024, Sch 9 from 6 April 2024 onwards. The commentary below covers the rules that apply prior to that date. Before continuing your research, see the Abolition of the lifetime allowance guidance note.This guidance note provides support for those needing to report taxable events in relation to overseas pension schemes that are not registered in the UK. It provides an overview only, with reference to further research materials. You may need to take specialist advice.The tax treatment of income from foreign pensions is discussed in the Foreign pension income guidance note.HMRC guidance on reporting pension savings tax charges, including those arising on overseas pensions, can be found in HMRC Helpsheet HS345.Significant changes have been made to the UK taxation of overseas pensions, broadening the application of UK tax to overseas pensions. Most of the changes in this legislation apply from 6 April 2017, but some provisions (for example, the overseas transfer charge below) date from 9 March 2017. See also Simon’s Taxes E7.248–E7.248B.A UK tax charge might arise in relation to overseas pension savings in arrangements not registered in the UK when the scheme includes ‘UK tax-relieved funds’ or ‘UK transferred funds’. Each of these terms is expanded on below. UK tax-relieved funds are essentially as they sound, ie the amount saved into an overseas pension that benefited from UK tax relief or exemption. However,
Interest in possession trusts ― income tax
Interest in possession trusts ― income taxIntroductionThis guidance note explains how to calculate the income tax liability on the income of an interest in possession trust. It also covers the general principles of income tax that apply to all trusts and identifies the features specific to an interest in possession trust.Trustees together are treated as if they were a single person (distinct from the individuals who are the trustees of the trust from time to time). In order to calculate the income tax liability for any trust, you first have to determine what type of trust it is. It is essential, when dealing with a trust for the first time, to read the trust instrument. As explained in the Taxation of trusts ― introduction guidance note, the income tax treatment will fall into one of two categories:•standard rate tax (bare trusts and all interests in possession), and•trust rate tax (discretionary and accumulation trusts)The nature of a discretionary interest and the income tax treatment is detailed in the Discretionary trusts ― income tax guidance note. Higher trust rates of tax apply to trustees’ accumulated or discretionary income.The income tax treatment of bare trusts is described in the Bare trusts ― income tax and CGT guidance note.An interest in possession is characterised by a beneficiary’s right to the income of a trust as it arises. The income belongs to the beneficiary, and the trustees have no authority to withhold it except to use it for legitimate expenses. The entitlement
Settlor-interested trusts
Settlor-interested trustsWhat is a settlor-interested trust?A settlor-interested trust is one where the person who created the trust, the settlor, has kept for himself some or all of the benefits attaching to the property which he has given away. A straightforward example is where a settlor transfers assets to trustees for the benefit of himself and his family, and the terms of the trust allow income or capital from the trust assets to be paid to him.In certain circumstances the creation of a settlement would offer a tax advantage because, for example, tax will be deferred or the trustees will pay tax at a lower rate. Tax law operates to remove this advantage if the settlor has not effectively divested himself of the trust property.The term ‘settlor-interested’ arises in connection with income tax and capital gains tax. For inheritance tax, the creation of a settlement from which the settlor may benefit is categorised as a ‘gift with reservation’.This guidance note describes the primary provisions relating to income tax and capital gains tax, and provides links to other guidance notes dealing with more specialised provisions.Income tax ― the Settlements CodeSettlor-interested trusts fall within the ambit of the anti-avoidance provisions of ITTOIA 2005, ss 619–648, sometimes referred to as the ‘Settlements Code’. The effect of these provisions is, broadly, to treat the income arising from settled property as belonging to the settlor, rather than the trustees or other beneficiaries, thus countering any potential income tax advantage of placing the assets with a
SDLT on property acquisitions by individuals ― tax rates
SDLT on property acquisitions by individuals ― tax ratesIntroductionStamp duty land tax (SDLT) was introduced for land transactions with effect from 1 December 2003. Whereas stamp duty was a tax on documents, SDLT is a tax based on the acquisition of a chargeable interest, whether or not evidenced in writing. When it was originally introduced, SDLT applied to all UK land transactions. Devolution has resulted in Scotland and Wales introducing their own regimes.From 1 April 2015, land and buildings transaction tax (LBTT) applies to land transactions in Scotland. For details of LBTT, see Sergeant and Sims on Stamp Taxes AA12–AA22 (SSSD, AA[AA351]–SSSD, AA[AA862]). See also the guidance on the Revenue Scotland website. From 1 April 2018, land transaction tax (LTT) applies to land transactions in Wales. For details of LTT, see Sergeant and Sims on Stamp Taxes AA23–AA34 (SSSD, AA[AA901]–SSSD, AA[AA2115]). See also the guidance on the Welsh Revenue Authority website. Whilst the underlying rules applying to LBTT, LTT and SDLT are broadly similar in nature, the taxes are not identical. The rest of this guidance note covers the law which applies to transactions in England and Northern Ireland only.This guidance note focuses on the SDLT rates that apply to transactions where the purchaser is an individual. For a discussion of the transactions that are chargeable to SDLT, the meaning of chargeable consideration, the meaning of residential and non-residential property, anti-avoidance provisions and SDLT reporting, see the SDLT on property acquisitions by individuals guidance note.For the rules that apply
Qualifying interest in possession
Qualifying interest in possessionSignificance of a qualifying interest in possessionWhere a beneficiary’s entitlement to trust property satisfies the definition of a qualifying interest in possession (QIIP), the trust property falls into the beneficial entitlement regime for inheritance tax purposes. See the Taxation of trusts ― introduction guidance note.The inheritance tax treatment of trusts falls into two broad categories:•beneficial entitlement (bare trusts and qualifying interests in possession), and•relevant property (non-qualifying interests in possession and discretionary trusts)Prior to 22 March 2006, all interest in possession trusts were included in the beneficial entitlement category, but changes introduced by FA 2006 transferred most lifetime interest in possession trusts into the relevant property category. Hence the beneficial entitlement treatment only applies to qualifying interests in possession. See the March 2006 changes to trust taxation guidance note.IHT consequences of beneficial entitlementThe term beneficial entitlement refers to the inheritance tax treatment under IHTA 1984, s 49, which provides that a person beneficially entitled to a (qualifying) interest in possession in settled property shall be treated for the purposes of this Act as beneficially entitled to the property in which the interest subsides. This means, in effect, that the trust property is taxed as if it belonged outright to the beneficiary. All other trust property is subject to the special inheritance tax rules of the relevant property regime. See the Definition of relevant property guidance note and other notes in that sub-topic. In summary, the consequences of the beneficial entitlement category are:•the full value
March 2006 changes to trust taxation
March 2006 changes to trust taxation22 March 2006 was the day of the 2006 Budget which, without any warning or consultation, made sweeping changes to the IHT treatment of trusts. The date represents a watershed in the IHT treatment of trusts since many of the key changes took immediate effect. To work out the correct IHT treatment of a trust today, it is necessary to look at whether it was made before or after 22 March 2006.Before 22 March 2006, trusts fell into the following three main categories for IHT purposes:•relevant property (RP) trusts, which were usually discretionary trusts•interest in possession (IIP) trusts, and•accumulation and maintenance (A&M) trustsOn that date, the relevant property regime (RPR) was extended to nearly all new lifetime trusts, whether in discretionary, IIP or A&M format. Similarly, lifetime additions of property to all existing trusts (with the exception of disabled trusts, bare trusts and some premiums paid in respect of life policy trusts) would also be within the RPR. Transitional rules were given to existing IIP and A&M trusts, but with a view to bringing those trusts within the RPR in the longer term. The aim was to try to make trusts less attractive for IHT purposes, though many other benefits to using trusts remain (see the Why people use trusts guidance note).The main disadvantage of making a relevant property trust is that the settlor incurs an immediate IHT charge, if the value of the settlement exceeds his cumulative nil rate band,
Partitioning trust funds
Partitioning trust fundsOverviewPartitioning a trust fund refers to splitting the fund between the income and capital beneficiaries. This will terminate the trust. This guidance note looks at how and when a trust can be partitioned and the tax effects of this. Partitioning a trust should be done by deed. Under the Legal Services Act 2007, writing deeds is a ‘reserved legal activity’ and should only be undertaken by a person authorised to do so under that Act. See the Reserved legal services guidance note for further information.Resettlements are covered in the Resettlements and sub-funds guidance note and variations are covered in the Variations guidance note.This guidance note deals with the position in England and Wales only. See Simon’s Taxes I5.8 for details of the provisions affecting Scotland and Northern Ireland.Reasons for partitioning a fundReasons for partitioning a fund might include:•the reason that the trust was set up no longer being relevant•the needs of a specific beneficiary•tax mitigation•the wish to reduce trust administration costs, or•a breakdown in relations between the beneficiariesWhere the beneficiaries want to bring the trust to an end by mutual agreement, whether or not the trustees agree, this can be achieved under ‘the rule in Saunders v Vautier’, provided the conditions set down in that case are met. The rule in Saunders v VautierFixed interest trustsThe rule in Saunders v Vautier provides that beneficiaries are able to bring the trust to an end between them without the agreement of the trustees where:
Family investment company (FIC)
Family investment company (FIC)What is a family investment company (FIC)?An FIC can apply to many different types of company structures used for different purposes although originally they began as estate planning vehicles. This guidance note summarises how an FIC can be a useful structure for a family business and provides links to additional sources of information. The structuring of FICs is a complex area with a lot of options on how to hold the shares, etc, therefore if an FIC structure is implemented, advice should be taken from relevant legal and tax experts.Essentially, an FIC is simply a company that has been established with the specific purpose of meeting the needs of, usually, a single family. An FIC allows the founders of the business to retain some involvement in the company and possibly a managed income stream but also pass the investments down to their children or grandchildren. They may be favoured above trusts because they are a more familiar structure but the option of using trusts should also be considered, see the Taxation of trusts ― introduction guidance note and the attached comparison of a FIC and a discretionary trust:The FIC is usually set up as a new company with a moderate level of share capital, eg 10,000, £1 ordinary shares to provide a reasonable capital base. Giving the family cash amounts in order to allow them to then subscribe for shares means that there are no issues of share valuation.Investments can be in any form that a
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