Taxation of Trusts

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The Finance Act 2006 has had considerable impact on trusts and particularly with regard to the taxation of trusts. It has been widely regarded as a “sledgehammer to crack a nut” as the amount of additional revenue from the tax changes raised by HMRC is relatively small but the amount of additional complexity and work required by those professionals involved in trustee work considerable.

In addition the changes introduced, without warning are widely regarded as “unfair”. For trustees and those involved in the drafting of trusts the future is likely to be challenging.

The new 28 per cent capital gains tax applies to trusts. It was thought that when this was first announced that the top rate of Capital Gains would apply only to discretionary trusts taxed at the higher rate.

However it is clear that the 28 per cent capital gains tax rate applies to all trusts, irrespective of the beneficiary’s personal tax.

For individual taxation CGT remains at 18% (where total taxable gains are less than the upper basic rate band. For trustees and representatives of deceased persons the rate is increased to 28%. So this higher rate applies to any gains made while administering an estate and throughout the duration of a trust.

Protests that these tax hikes are being applied to trusts and wills drafted in good faith under the previous lenient regime for trusts have fallen on deaf ears.

One exception to the legislation is if the trust or estate is eligible for entrepreneur’s relief, the rate for capital gains tax is effectively 10 per cent up to £5 million.

If you have an existing trust or are considering sheltering assets using a trust then you need to give careful consideration of how you establish the trust and also perhaps  consider wrapping it around an offshore bond.

For advice on creating trusts, capital gains tax  or you would like our advice on a trusts you already have please contact one of our Financial Planning Consultants, at Pareto Lawrence we offer both Financial and tax planning advice to corporate and private clients.

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