Trusts and tax (for Advanced Taxation - United Kingdom (ATX-UK) (P6))

Part 1 of 4

This is the Finance Act 2017 version of this article. It is relevant for candidates sitting the Advanced Taxation – United Kingdom (ATX-UK) (P6) exam in the period 1 June 2018 to 31 March 2019. Candidates sitting ATX-UK (P6) after 31 March 2019 should refer to the Finance Act 2018 version of this article (to be published on the ACCA website in 2019).

From the September 2018 session, a new naming convention is being introduced for all of the exams in the ACCA Qualification, so from that session, the name of the exam will be Advanced Taxation – United Kingdom (ATX-UK). June 2018 is the first session of a new exam year for tax, when the exam name continues to be P6 Advanced Taxation (UK). Since this name change takes place during the validity of this article, ATX-UK (P6) has been used throughout.

This article has been written because the taxation of trusts and the transfers of assets to and from trustees is a complicated area of the UK tax system. Accordingly, there is a need to set out the rules that may be examined and those areas where knowledge is not required. However, trusts represent only a small part of the ATX-UK (P6) syllabus and the existence of this article should not be seen as an indication that the taxation of trusts is of particular importance to the ATX-UK (P6) exam.

The requirements of the ATX-UK (P6) syllabus in respect of trusts include:

  • the ability to distinguish between the different types of trust
  • the ability to explain how income tax, capital gains tax, and inheritance tax apply to transactions involving trusts
  • knowledge of the tax implications of creating a trust – now or in the future – including what will happen when trust property passes to the beneficiary
  • knowledge of the inheritance tax implications of a settlor dying after creating a trust
  • the ability to explain how trusts can be used in tax and financial planning.

The following aspects of the taxation of trusts are excluded from the syllabus:

  • the calculation of income tax, capital gains tax, and inheritance tax payable by the trustees of a trust
  • knowledge of situations where property is transferred between trusts or where the terms or nature of the trust is altered
  • knowledge of situations where property within a trust with an immediate post-death interest passes to the spouse or civil partner of the settlor on the death of the life tenant
  • the conditions that had to be satisfied for a trust to be an accumulation and maintenance trust
  • knowledge of the special rules concerning trusts for the disabled, trusts for bereaved minors, transitional serial interest trusts, and age 18 to 25 trusts.

This article only covers trusts created on or after 22 March 2006. Trusts created prior to this date are not examinable.

Why use a trust?

Trusts enable the benefits arising out of owning property, for example, the receipt of rental income in respect of a commercial investment property, to be enjoyed by someone other than the legal owner of the property. The law of trusts recognises that there can be a beneficial owner of property, known as the ‘trust beneficiary’, who is not the same as the legal owner (whose name is on the title deeds to the property), known as the trustee.

This split of legal and beneficial ownership gives rise to various possibilities including:

  • the benefits of owning property can be transferred to minors whilst leaving control over the assets, together with the responsibilities of managing and maintaining them, with the trustees
  • the income generated by assets can be made available to one individual or group of individuals whilst the capital is preserved and protected for another individual or group
  • provision can be made in a will for assets, or the income generated by them, to be directed towards those in financial need in the years following the death of the testator (the person who made the will)
  • the creator of the trust can retain control over the assets.

In addition, a number of tax planning opportunities arise, including:

  • assets may be transferred into trust such that they are removed from the settlor’s estate (the settlor is the person who establishes the trust)
  • assets may be transferred into trust such that they will increase in value outside of both the settlor’s and the beneficiaries’ estates
  • trustees of a discretionary trust can direct income towards beneficiaries who are non-taxpayers such that there will be a repayment of the income tax paid by the trust.

Written by a member of the ATX-UK (P6) examining team

The comments in this article do not amount to advice on a particular matter and should not be taken as such. No reliance should be placed on the content of this article as the basis of any decision. The authors and ACCA expressly disclaim all liability to any person in respect of any indirect, incidental, consequential or other damages relating to the use of this article.