The purpose of trust is to manage assets such as money, investments, land, and buildings; some common reasons for trusts being set up include controlling family assets, passing on assets to a beneficiary while you are alive or deceased, and having control over family assets. Trusts are characterized by the settlor (the individual who places the assets on trust), the trustee (the individual who manages the trust), and the beneficiary (the individual who receives benefits from the trust). Trust deeds are drafted by the settlor and specify how assets in a trust should be used. Trustees manage trusts and deal with trust assets daily as per trust deed. Beneficiaries can be one or more and they may receive income from the trust, capital from the trust, or both.

 

There are different types of trust, and you pay tax differently for each one of them.

 

Bare Trust

In this trust, assets are kept under trustee and handed over to beneficiary once they reach the age threshold (18 years in England or Wales, and16 years in Scotland).

 

Beneficiary is responsible for paying tax on the income received.

 

No Capital Gains Tax if assets are transferred to the beneficiary.

 

No Inheritance Tax if the person who has transferred the assets lives for 7 years after the transfer. However, if the person dies before 7 years, then extra 20% inheritance tax must be paid.

 

Discretionary trusts

In this trust, Trustee can make utilisation decisions on trust income and capital income. Referencing to trust deed, trustee can make decision on what gets paid out, which beneficiary to receive payment, frequency of payment, and special condition to impose on beneficiary.

 

Trustees pay tax and they do not qualify for dividend allowance, hence pay tax on all the dividend income.

 

Tax-Rate that trustee pays:

Income	Dividend tax rate	Tax rate on Rest of the income
First £1,000	8.75%	20%
Above £1,000	39.35	45%

 

When the Settlor has more than one trust, the £1,000 will be divided by the number of trusts the Settlor has. If the number of trusts exceeds five, then the £200 income will be taxed at 20%.

 

Interest in possession trusts

In this, trustee must pass all the income from trust to the beneficiary.

 

Tax-Rate that trustee pays:

Income	Dividend tax rate	Tax rate on Rest of the income
First £1,000	8.75%	20%

 

If trustee passes income directly to the beneficiary, then beneficiary should file self-assessment tax return on the income received.

Capital Gains Tax:

No Capital Gains tax if someone dies and assets are transferred to someone else.

Inheritance Tax:

Beneficiary must pay 10-yearly Inheritance tax on the assets transferred after 22 March 2006. However, if you have inherited the asset after someone died, then no 10-year anniversary inheritance tax. But a 40% tax will be applicable when you die.

 

No inheritance tax if the assets stay in the trust in the interest of beneficiary.

 

Accumulation trusts

In this, trustees can accumulate income within the trust and add it to the trust’s capital.

Trustees pay tax and they do not qualify for dividend allowance, hence pay tax on all the dividend income.

 

Tax-Rate that trustee pays:

Income	Dividend tax rate	Tax rate on Rest of the income
First £1,000	8.75%	20%
Above £1,000	39.35	45%

 

Settlor-interested trusts

In this trust, the settlor retains an interest in the trust assets or income, directly or indirectly. Settlor or their spouse or civil partner benefits from this trust. The trust can be Discretionary trusts, Accumulation trusts, or Interest in possession trusts.

 

Settlor is responsible for declaring and paying the income tax as the income generated by the settlor-interested trust is considered as the income of settlor.

 

How tax is paid:

Trustee pays the income tax on the trust income by filing out a Trust and Estate return. They give Settlor the statement of the tax files. Settlor tells HMRC about the tax the trustees have paid on their behalf on a Self-Assessment tax return.

 

Non-resident trusts

In Non-resident trust, Trustees are not UK resident for tax purposes.

A non-resident trust is one,

 

• that has trustees who are all resident outside the UK, or
• where there’s a mix of resident and non-resident trustees acting at the same time, and the settlor was neither resident in the UK nor domiciled in the UK, when the trust was set up or any later funds were added.

Domicile refers to the country that a person treats as their permanent home.

 

To set up a non-resident trust in the UK, you need to register the trust, to make sure the trust complies with anti-money laundering regulations. When the trust has liable UK income or UK assets, you will need to register the trust either as an

• agent registering a client trust, or
• trustee.

 

How does non-resident trust taxed?

Tax rules on a non-resident trust depends on the type of trust, if settlor has interest in trust, and resident status of settlor or beneficiaries.

 

Income Tax:

Trust Type	Tax- Compliance
	Income	Dividend Income	Interest Income from investments
Interest in possession trusts	20%	8.75%
Discretionary trusts	20% on first £1,000 45% on the remaining income	39.35% on income from stocks and shares	45%, if there is a beneficiary or potential beneficiary who is a UK tax resident.
Accumulation trusts	20% on first £1,000 45% on the remaining income	39.35% on income from stocks and shares	45%, if there is a beneficiary or potential beneficiary who is a UK tax resident.

 

Capital Gains Tax:

You need to pay Capital Gain tax if the value of the assets has increased from the time they were invested in the trust and are sold, given away or exchanged. A settlor or the beneficiaries may have to pay tax on the profits made by the non-resident trustees. If non-resident trustee disposes a UK property or land, then they are liable to Capital gains Tax.

 

Inheritance Tax:

Trustees of non-resident trusts will only have to pay tax on assets situated outside the UK, if the settlor was domiciled in the UK when the assets were put into the trust. Inheritance tax may be due when:

• assets are put into the trust,
• the trust reaches a ten-year anniversary, or
• assets are taken out of the trust or the trust ceases.

 

Mixed trusts

Combination of trust types.

 

How to register a trust?

You should register a trust if the trust has a liable UK income or UK assets. The process to register a trust as an agent or a trustee is same.

1. Fill out the registration form at HMRC website, providing details of non-resident trust, its trustees, beneficiaries, and activities in the UK. Details like trust’s legal name, address, tax identification number (if applicable), and the names and contact information of trustees and beneficiaries.
2. Submit supporting documents like trust deeds, identification documents for trustees.
3. Pay the required fees and submit the registration form and wait for the registration confirmation.
4. After registration, you will get a Unique Taxpayer Reference, which will be needed to file self-assessment tax return.
5.  Ensure ongoing compliance with all legal and regulatory requirements applicable to agents and trusts operating in the UK. 

 

When should you not register a trust?

Individuals may choose to not to register a trust if the trust assets are minimal involving no legal tax implications. This could be possible for a trust that is:

1. Arranged informally and involves only the family members or close relatives.
2. A revocable trust, where the settlor has the right to modify or revoke the trust arrangement.
3. Discretionary trusts that do not generate taxable income or have minimal assets.
4. Trusts established solely for the purpose of holding and managing specific assets, such as property or investments.
5. Low risk of disputes or conflicts among beneficiaries, trustees, or other parties.

 

What will happen if you fail to register a trust?

If the trust is non-complaint with the UK laws, then it could face legal consequences such as:

1. Challenges to the trust’s validity or enforceability.
2. Penalties or fines imposed by HMRC.
3. Loss of registered trust benefits like tax reliefs, exemptions, or preferential treatment.
4. Non availability of financial institutions like opening a bank account.
5. Regulatory scrutiny or investigation by authorities.

 

When do you pay Capital Gains Tax (CGT)?

Capital Gains tax is tax on the profit when an asset that’s increased in value is taken out of or put into a trust. If the asset is put in a trust, then CGT is paid by the settlor transferring the asset or person selling the asset. If assets are taken out, then trustee pays the tax on behalf of the beneficiary.

 

Based on the eligibility, trustee can claim for below reliefs:

1. Private Residence Relief: No CGT if trustee sells a trust owned property.
2. Business Asset Disposal Relief: 10% CGT on qualifying gains if they sell assets used in a beneficiary’s business, which has now ended. If beneficiary has 5% shares and voting rights, then they may get relief when they sell shares.
3. Hold-Over Relief: No CGT if transfer assets to beneficiaries.

 

Tax free allowance: £3,000.

For vulnerable beneficiary (disable or a child whose parents died), tax free allowance: £6,000.

 

When do you pay Inheritance Tax?

Inheritance tax is applicable on the person estate when they die or transfer some of their estate into a trust even when they are alive, or the trust reaches the 10-year anniversary, or assets are transferred out of a trust.

 

Tax on Inheritance tax: 40% above the threshold (£325,000), or 36% if person leaves 10% of the estate to charity.

Pension is a long-term investment, usually having the financial security during retirement phase. Individuals contribute to Pension fund throughout their working life using different means like personal contributions, employer contributions and government contributions. The various means to save money for the retirement are by contributing a portion of your salary in one or more of the below options.

 

1. Workplace Contribution: Under Employer Pension Scheme, both employer and employee contribute towards pension.
2. Personal Contribution: Individual set-up an amount of contribution to pension for retirement with the help of pension provider or a financial institution.
3. State Pension: Government contributes to state pension based on an individual’s National Insurance contributions.
4. Invest in assets like stocks, bonds, and property, so that the invested amount grows over time through investment return.

 

You will be able to utilise the invested savings at the time of retirement. Pension savings can be availed using annuities, flexi-access drawdown, lump-sum withdrawals, or state pensions.

1. Annuities: You can purchase annuities using your pension savings and guarantee yourself a regular income throughout life or up to certain period.
2. Flexi-access drawdown: You can use the pension money as and when needed, abiding to tax rules and regulations.
3. Lump-sum Withdrawals: Once you reach the retirement age, you can take-out a lump-sum amount of the pension savings, usually 25%.
4. State Pension: Once you reach the retirement age, a regular payment is provided by the government to you based on the contribution made in the National Insurance.

 

Lifetime Allowance:

Lifetime Allowance is the tax-free limit set by the government to the total amount of pension saved by an individual throughout their working life. This includes total of money saved from all types of pensions (defined contribution pension) like workplace pensions, personal pensions, and self-invested personal pensions (SIPPs). The standard Lifetime allowance is £1,073,100.

 

You may have to face tax charges on amount exceeding lifetime allowance, in the event of taking pension benefits, reaching age 75, or transferring pension benefits overseas. The tax rate depends how much you have taken from the pension savings. There’s no lifetime allowance charge (only income tax) if you took the pension on or after 6 Apr 2023. However, if you took your pension saving before 6 Apr 2023, then the tax rate depends on the method you choose to avail your pension amount. 

1. If your pension provider has paid over the allowed lumpsum amount of £30,000, then 55% tax is paid on excess amount. 
2. If the excess amount is taken as income, it is subject to a Lifetime Allowance charge of 25% in addition to income tax.
3. You may also apply for protection schemes offered by HM Revenue & Customs (HMRC), such as Fixed Protection or Individual Protection. These schemes allow you to protect pension savings from Lifetime Allowance tax charges up to certain limits.

 

Smart Way to access the Pension Amount

At retirement, you can access the pension tax-free by using one of the listed options.

1. Lump-Sum tax free Amount: This is a standard feature available to all pension savers. 25% of the lump-sum pension is tax-free and the remaining 75% is subject to income tax when withdrawn as income. The maximum tax-free allowance is 25% of Lifetime Allowance (£1,073,100). If you hold lifetime allowance protection, then this may increase the amount of tax-free lump sum you can take from your pensions.

Considering both scenarios:

1. Let’s suppose the total pension saved is £80,000.

Tax-free lump-sum amount is= 25% of £80,000

                                                    = £20,000

Taxed Amount is = £60,000

1. Let’s suppose the total pension saved is £ 1,500,000.

Tax-free lump-sum amount is= 25% of £1,073,100

                                                   = £268,275

Taxed Amount is = £1,231,725

 

1. Small Pot Withdrawals: This is available to individuals whose total pension is worth of £10,000 or less with called smaller pension pots. The small pot limit is set by HMRC, and it is £10,000 for the tax-year 2024-25. To qualify for the small pot withdrawal, 

• you must be of age 55 or more,
• Not taken more than three small pots from different personal pensions, and
• You must meet the residency requirement.

Eligible individuals can take-out the complete lump-sum amount in one go as tax free.

 

1. Trivial Commutation lump sum: If total value of all your pension savings across all pension schemes (Defined Contribution Pension) is £30,000 or less, then you can use this lump sum benefit. It’s a one-time option, can be availed once in lifetime.
2. You may be able to take all the pension money tax-free if your life expectancy is less than a year, and you are not older than 75 years, and your pension savings is not more than the lifetime allowance.

 

P60 Form shows how much tax you have paid. You will get this form from the Pension provider.

 

How does National Insurance works on Pension?

You pay different NIC based on the status of your employment at the time you reach the State Pension age.

 

Employment Status	State pension Age Reached?	Pays National Insurance?	What kind of National Insurance?
Self-employed	Yes	Yes	NIC Class 4, it stops at the end of tax year you have reached State Pension age.
Employed	No	Yes	NIC Class 1
Self-employed	No	Yes	NIC Class 2 at flat weekly rate NIC Class 4 annually
Employed	Yes	No	You do not pay NIC.

 

Private Pension Contribution

A private pension is a personal pension arranged by individuals themselves. They can choose how much to contribute, where to invest their contributions, and how and when to access their pension benefits in retirement.

 

Tax on private pension:

You can get 100% tax relief worth up to your annual earnings. You can get tax relief either automatically or you need to claim it yourself.

Tax relief happens automatically in either of two cases:

1. If your employer takes workplace pension contribution before deducting income tax, or 
2. Your pension provider claims tax relief at 20% rate (relief at source) to the government and adds it to your pension pot.

 

When do you need to claim tax relief:

If you pay more than 20% tax and your pension provider claims the first 20% for you, or your pension is not set for automatic relief, or someone else pays for your pension.

 

For income where you pay 40% tax, you can claim extra 20% tax relief on the pension money and for 45% tax, you can claim 25% tax relief.

Example: 

You net annual salary is £70,000 and 

your pension contribution is £25,000. 

You pay 40% tax on £20,000 of the income, so you can claim additional 20% tax relief on this £20,000 pension contribution during self-assessment filing. 

However, You cannot claim for the remaining £5,000 pension contribution, that will be paid as it is.

 

In case, you do not pay tax because you are on a low income or your pension provider claims 20% tax relief, then also you will get 20% tax relief on the first £2,880 to the pension contribution.

 

You cannot claim tax relief if you use pension contribution to pay for Life Insurance Policies.

 

Pension Annual Allowance:

This scheme helps to save tax on the pension pot in a tax year, and it is £60,000. You will pay tax if your annual pension pot saving goes above this value. If you use all the annual allowance allowed in a year, you could still use the remaining annual allowance of the last three years.

 

Who has lower annual allowance?

1. Someone who uses their pension contribution as flexi-access drawdown fund, or
2. Someone who cash out from the pension pot, or
3. Someone with high income, like threshold income is over £200,000 and adjusted income is over £260,000.

 

Tax on the Pension you inherit when someone dies:

When someone dies, the pension money is usually inherited by the nominated individual, or sometimes if the nominated person is dead or not found, the pension provider can pay the money to someone else. The money from defined benefit pot is inherited to dependents, spouse, civil partner, or children under 23 years. The individual who has inherited the pension pot, can nominate someone to utilise the unused money after they die, provided the defined pot is flexi-access drawdown fund when the individual die.

 

Tax on inherited pension is dependent on type of payment you get, type of pension pot, and age of pension pot when they died.

You will pay tax if on the inherited pension if:

1. Pension provider has paid you for more than 2 years after the person died. You will pay income tax on the additional paid amount.
2. The pension saving is above the lifetime allowance £1,073,100. You will pay income tax on excess amount.