4 min read 1 Jul 21
Trustees have various statutory and common law duties in performing their role.
One of their duties is to keep up to date accounts and submit tax returns in respect of the trust investments. In addition, when investing the trust property trustees have a responsibility to take into account the impact of tax on the investments in order to maximise returns for beneficiaries.
OEICs generate both income and capital gains which means there are two taxes for the trustees to take into account. Depending on the type of trust there are potentially reporting requirements for the trustees, beneficiaries and in some cases the settlor.
When providing investment advice to trustees holding OEICs it is therefore essential to understand what the tax implications are for the parties involved in different situations.
OEICs produce income whether the trustees invest in income or accumulation shares. Even if this income is reinvested or rolls up in the share price, it is taxable in the tax year it arises. Establishing who is assessed on this income when dealing with a trust however, is not always straightforward. The type of trust, how it was set up and how it’s being administered will determine the tax implications for the trustees, settlor and beneficiaries.
A bare/absolute trust is not technically a settlement. From an income tax point of view you normally “look through” the trust. The beneficiary is assessed on income in the tax year it arises and it’s their responsibility to complete a tax return for any tax due. Savings income can be offset against the individual’s personal allowance, Personal Savings Allowance or starting rate for savings, and dividends against the dividend allowance.
It’s not always that simple though. If the beneficiary is a minor unmarried child of the settlor and income from the trust exceeds £100, the full amount is deemed to be income of the settlor. In these cases the settlor will need to complete a tax return. When assessing the £100 limit, you must take account of income arising on all gifts between that parent and child. This rule only applies to parents so does not affect gifts made by grandparents.
A discretionary trust has a standard rate band (SRB) in which dividend income is taxed at 8.35% and other income at 20%. The SRB is normally £1,000, however where the settlor has set up more than one discretionary trust this is split between them subject to a minimum of £200 per trust. Dividends in excess of the SRB are taxed at 39.35% tax and other income at 45%.
When income is distributed to beneficiaries it is classed as “trust income” which means allowances that apply to savings and dividends cannot be used by the beneficiary. Trust income exceeding the personal allowance will be taxed at the UK (or Scottish) rates applicable to non-savings, non-dividend income.
Trust income comes with a tax credit of 45% so the trustees may need to pay additional tax to HMRC on distributed income to satisfy the tax credit. The trustees will need to complete a tax return for the income each year and keep a record of tax paid, known as the “tax pool”.
The beneficiary can reclaim the difference between their own tax liability and tax paid by the trustees via self-assessment.
Trustees of an IIP trust pay basic rate tax on all income received by the trust (7.5% on dividends and 20% on other income), however the beneficiary with the IIP is also assessed on the income in the tax year it arises.
Income retains its character as dividend or savings income so can be offset against the beneficiary’s various nil rate allowances. Credit is given for the tax already paid by the trustees and the beneficiary can reclaim tax paid if their liability is less than this, or pay more if it’s higher. Both the trustees and the beneficiary will need to complete a tax return in the year income arises.
Alternatively the trustees can “mandate” income directly to the IIP beneficiary. This avoids the need for the trustees to complete a tax return or pay any tax and the beneficiary is assessed directly.
Another point to note is that where the settlor or settlor’s spouse/civil partner is a potential beneficiary of a discretionary or IIP trust, the trust is classed as “settlor interested”. In these cases the income is assessed on the settlor personally rather than the normal rules applying. The trustees will pay tax and prepare a tax return as normal (since they receive the income). In addition, the trust income will be entered on the settlor’s tax return, with the settlor setting off the tax paid by the trustees. Depending on circumstances, the settlor may have more tax to pay, or receive a refund.
In addition to income tax, trustees also need to consider CGT on any OEIC investments.
CGT is payable on “disposal” of an asset which will normally be a sale, but a disposal also arises on certain transfers. There are 2 circumstances where trustees may be liable for CGT:
How capital gains are taxed within trusts basically comes down to whether the trust is absolute or not. Capital gains on absolute trusts are assessed on the beneficiary personally. Gains on disposals within other trusts are assessed on the trustees.
Similarly to individuals, trustees have an annual exempt amount (AEA) and gains within this limit are exempt from CGT. The AEA for trusts is normally half the AEA of an individual i.e. £6,150, but as with the standard rate band it’s split between the number of trusts set up subject to a minimum of £1,230 per trust. Any gains in excess of the exemption are taxed at 20%. As well as reporting capital gains, trustees need to keep track of capital losses so these can be offset against gains arising in the future.
“Qualifying IIPs” are treated slightly different for CGT purposes. Qualifying IIPs are where the trust is either created:
In terms of OEICs and CGT, the difference with a qualifying IIP is that on the death of the beneficiary with the life interest, no taxable gain arises against the trustees. This is similar to the position with an individual who dies holding an OEIC where the gain effectively dies with the owner.
Where the trustees transfer an OEIC out of a “non-bare” trust it is classed as a disposal however the trustees and the beneficiary can claim “holdover relief”. This means the gain is essentially deferred and accounted for by the beneficiary on a later disposal.
It’s often said there are two sides to every story. With income tax and capital gains tax in the mix, this saying certainly applies to OEICs held in trust. However, as an adviser it’s important to remember that the story is not the same for every trust.
The information contained in this page is for professional Financial Adviser use only. If you are a private investor, please visit the Private Investor section or contact your Financial Adviser for more information.