The Trustee Act 2000 (England and Wales) and similar legislation for Northern Ireland and Scotland widened the investment options for nearly all trusts. But it also put more responsibilities on the trustees to seek appropriate advice from suitably qualified individuals, to review the investments on a regular basis and to ensure suitability of trust investments and consider the need for diversification.

Trustees and their financial advisers are required to understand the tax consequences of the investments held within the trust, and the options available to them to try and reduce the tax burden. The introduction of a flat rate of capital gains tax of 28% for gains realised after 22 June 2010 and a top rate of income tax of 50% has reinforced this requirement.

This section addresses income tax, capital gains tax and inheritance tax for the trustees and where applicable, the beneficiaries and settlor(s).

Absolute or Bare

Assessed on the beneficiary unless a parental settlement.

Absolute or Bare

Assessed on the beneficiary at 18% or 28% with full personal annual exempt amount (£10,100 2010/11) available.

Absolute or Bare

The gift into the trust will be a potentially exempt transfer, to the extent that it doesn’t come within one of the IHT exemptions. If the settlor dies within seven years of making the gift, the gift will become chargeable. If the beneficiary dies at any time whilst the trust is in force, the value of the trust fund is included in the beneficiaries’ estate for IHT purposes.

Where the settlor (or their spouse or civil partner) can benefit from the trust, it will be treated as a settlor interested trust.

This means that income arising under the trust will be assessed on the settlor, even if he does not actually receive or benefit from it. The settlor has the right to recover the amount of any tax suffered from the trustees.

A flat rate of CGT has been introduced, which means that the anti-avoidance provisions applicable to CGT no longer apply.

If a trust is created on death and creates an interest in possession and the life tenant is the spouse or civil partner of the deceased, it will remain outside the relevant property regime but the capital value will form part of the life tenant’s estate for IHT purposes. The gift into the trust will also be exempt for IHT purposes.

With trusts now being liable to income tax rates of up to 50%, financial advisers should make sure the trust holds its investments in the most tax efficient manner. This is especially important if income is being reinvested. Understanding the beneficiaries’ need for income, rights to capital and the investment objectives of the trustees will enable advisers to minimise tax and maximise planning and investment opportunities.