TRUSTEE INVESTMENTS

If you are involved with the running of a trust you will probably need to know the rules around trustee investments. In this article we examine everything you need to know about trustee investments including the types of trust, their taxation and what types of investments you should consider. Please note that this article is not intended for trustees of registered charities governed by the Charities Act 1993.

Key points:

  • Types of trusts
  • Taxation of trustee investments
  • Strategies for trustee investments
  • Dealing with your responsibilities as a trustee
  • Free resource for trustees

Trustee investments – types of trusts

Before you consider the best trustee investments for your trust, you first need to understand the different types of trusts available to you. Unless you are currently planning to set up a trust, this choice will not be open to you. The reason that this is important when considering trustee investments is that each type of trust has different rules over taxation.  This therefore means that different trustee investments become appropriate based on the taxation situation of the trust.

It should be noted that the taxation situation for trusts changed significantly following legislation in 2006. Therefore, we recommend that you seek professional advice before embarking on any trustee investments since the tax situation can be complex. These are the main types of trust you will encounter as a trustee.

Bare trusts

This is a type of trust where the beneficiary has an immediate right to receive the proceeds of the trust, including capital and income. A bare trust might be used in relation to a simple transfer of assets, perhaps in a will or as a gift, and has a benefit to the settlor since they can be certain that the money will definitely pass to whoever they intended. Beneficiaries cannot be changed. Since the beneficiary is entitled to receive the proceeds absolutely, it is likely that they will take possession and use them money in their own right. Therefore, trustee investments are less relevant to bare trusts, unless they are managing assets for children.

Interest in possession trusts

This is a type of trust where one class of beneficiary has the right to enjoy an asset for a period or to receive all the income from it. Typically, this is used to separate the income and capital from an asset, or to grant someone the right to live in a property for life. When considering trustee investments you will need to think about the needs of various types of beneficiaries.

Discretionary trusts

Discretionary trusts exist to be more flexible. The trustees have broader rules around who they can grant benefits to, and no beneficiaries have the absolute right to receive anything from the trust.

Taxation of trusts

Once you have identified the type of trust you are operating as trustees, you should then consider the taxation of your trust. This is important since it is one of your roles as a trustee to account for tax to HMRC.

Taxation of bare trusts

  • Income tax
    The beneficiary is liable for any tax paid on income received by the trust. The beneficiary will need to complete a self assessment return.
  • Capital gains tax
    The assets of bare trusts are treated as if the beneficiary owns them. Therefore any capital gains are taxed against the beneficiary, who must complete a tax return. Beneficiaries will be taxed on gains over £10,600 at 18% or 28%.

Taxation of interest in possession trusts

  • Income tax
    Often the beneficiaries entitled to receive income from the trust do not have the right to receive capital from it. Trustees are responsible for paying the income tax due in an interest in possession trust based on the position of the beneficiary, and therefore complete a trust and estate tax return. Tax rates start from 20% for rent and savings interest, and 10% for UK dividends.
  • Capital gains tax
    Gains made by interest in possession trusts are paid by the trustees. The trust has an annual allowance of £5,300, under which capital gains are tax free. After that, gains are taxed at the trustee rate of 28%.

Taxation of discretionary trusts

  • Income tax
    The trustees of discretionary trusts must complete a trust and estate tax return and pay income tax due. If the trust income is up to £1000 the income tax rates are 20% for rent and savings, and 10% for dividends. If the trust income is over £1000 then trustees pay income tax at the trustee rate, which is 37.5% on dividends (from the 2013 tax year) or 45% on other income (from the 2013 tax year). Once income has been paid to a beneficiary they may be able to reclaim some tax based on their income tax rates.
  • Capital gains tax
    Gains made by interest in possession trusts are paid by the trustees. The trust has an annual allowance of £5,300, under which capital gains are tax free. After that, gains are taxed at the trustee rate of 28%.

Strategies for trustee investments

As you can see there are different ways to tax trusts based on their type and activity. therefore when selecting trustee investments you need to be aware of these taxation differences and select investments according to the needs of the trust as well as the tax situation.

Interest in possession trusts

Since there is usually a need to generate income from these trusts you should avoid trustee investments which do not pay an income. Otherwise you would be seen to be benefiting capital beneficiaries over the ones entitled to income. The solution is to select trustee investments which invest in general investment accounts such as unit trusts, investment trusts or OEICs. You could also select directly held investments such as shares, gilts or corporate bonds. The benefit to the trust is that they will achieve relative tax efficiency and will be able to divide the income and capital received appropriate to the needs of the various beneficiaries.

Discretionary trusts

Since the tax on income to these trusts is so onerous, the best solution is to invest in non-income producing trustee investments. The best solution is investment bonds. these trustee investments do not produce income and are taxed using the chargeable events regime. This means that no income is produced during the lifetime of the plan, and no capital gains tax is paid either. there may be tax to pay when the investment bond is cashed in. The trust can also withdraw up to 5% of the original investment capital each year for 20 years, which will not be taxable at that point.

Trustee investments – dealing with your responsibilities

The rules surrounding trustee investments are complex. As a trustee you have many responsibilities to look after the needs of your beneficiaries and to diversify assets. The best way to achieve this with certainty is to take advice from regulated experts in Investment Management for trustee investments. We have created this service as a way for you to deal with your responsibilities as trustees.

Trustee investments – case study

We have also created a trustee investment case study designed to show how the Investment Management service works for you in practice.

Photo credit: Flickr>Sarah G…

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Dan Woodruff

Certified Financial Planner & Chartered Wealth Manager at Woodruff Financial Planning
Financial Planning helps you to navigate and anticipate significant life changes. I want to help you to ensure your money is managed wisely to give you the financial security that will fund the future and lifestyle that is important to you.

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