Part 1 of 3
This is the Finance Act 2018 version of this article. It is relevant for candidates sitting the ATX (UK) exam in the period 1 June 2019 to 31 March 2020. Candidates sitting ATX (UK) after 31 March 2020 should refer to the Finance Act 2019 version of this article (to be published on the ACCA website in 2020).
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) 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) exam.
The requirements of the ATX (UK) syllabus in respect of trusts include:
There has been a change to the ATX (UK) syllabus for this and future years: trusts with an immediate post-death interest are no longer examinable. The only trusts which are now examinable are “relevant property” trusts. Accordingly, in this article, the term ‘trust’ refers to relevant property trusts only.
The following aspects of the taxation of trusts are excluded from the syllabus:
This article only covers trusts created on or after 22 March 2006. Trusts created prior to this date are not examinable.
Trusts enable the benefits arising out of owning property/assets, for example, the receipt of rental income in respect of a commercial investment property or dividends received in respect of shares, 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:
In addition, a number of tax planning opportunities arise, including:
A trust is created when a settlor transfers the legal ownership of property/assets to the trustees who hold the property/assets for the benefit of the beneficiaries. The property/assets in the trust is known as “relevant property”.
Where a beneficiary is entitled under the trust deed to the income from the property or to use the property, the trust is an ‘interest in possession trust’ and the beneficiary is known as the ‘life tenant’. The person who receives the trust property on the death of the life tenant is known as the ‘remainderman’ and their interest is known as a ‘reversionary interest’.
This form of trust may be used to provide the income generated by the trust assets to a person (the life tenant) for their lifetime with the assets then being transferred to the remaindermen on the death of the life tenant. The life tenant does not have access to the assets themselves, such that they are protected and will, eventually, be transferred to the remaindermen.
Where the trustees have discretion as to the accumulation and distribution of trust income and assets such that a particular beneficiary only has the possibility (as opposed to a legal right) of receiving a benefit under the trust, the trust is known as a ‘discretionary trust’.
This form of trust enables a settlor to make general provision for the future needs of the beneficiaries in a flexible manner. The trustees will decide how to meet the precise needs of the beneficiaries as and when they arise in the future.
Property can be transferred into trust by a settlor whilst they are alive or via their will. In addition, following an individual’s death, a trust can be created via a deed of variation.
Written by a member of the ATX (UK) 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.