Frequently asked questions

My client is thinking of setting up an L&G Gift trust with the trustees investing in a Portfolio Bond. In the event that a chargeable gain arises whilst the Bond is held within the trust, upon whom will the gain be assessed to tax?

Since both your client and the individual(s) he / she appoints as additional trustee(s) must all be resident in the UK, the trust will treated as UK resident for tax purposes. The assessable person will depend upon the type of trust your client intends to establish, as follows;

Absolute Gift Trust

Where a beneficiary(s) has an indefeasible vested interest in the trust income and capital, i.e. an Absolute / Bare trust, the trust “wrapper” is ignored and the beneficiary(s) is the person(s) liable to tax on that part of the gain attributable to his / her entitlement under the trust as per ITTOIA 2005/s.465 (2). As a consequence, the beneficiary will be able to make use of top-slicing relief (in accordance with normal chargeable gain calculation principles) to determine whether he / she will be liable to tax at 20% on some or all of the gain realised by the trustees.

Following receipt of legal advice, HMRC has recently confirmed (Revenue & Customs Brief 51/08) that the basis of taxation described above will apply to the assessment of all chargeable gains from tax year 2007/08 onwards, irrespective of the age of the absolute beneficiary. The only exception to this approach will be when the parental settlement provisions apply (ITTOIA2005/s.629) as extended by Finance Act 1999 to encompass absolute trusts. In relation to this type of trust such provisions will apply where:

• The person creating the trust is a parent of the beneficiary absolutely entitled, and
• The beneficiary is a minor who is unmarried / not in a civil partnership, and
• The whole chargeable gain (i.e. before top-slicing) plus any other income from all such trusts created by the same parent for the child exceed, in total, £100 gross for the relevant tax year.

In these circumstances because the chargeable gains are treated as income for the purposes of ITTOIA2005/s.629, they will be caught by the “£100 rule” meaning that all the income arising from the trusts in question for that tax-year will be taxed on the parental settlor. The £100 de minimis limit is available in relation to income arising from gifts into trust(s) established by both parents. For example, if both parents contribute equal sums into an absolute trust for the benefit of their minor unmarried child then gross income of up to £200 per tax year could accrue without infringing the parental settler anti-avoidance provisions.

Flexible  / Discretionary Gift Trusts

In accordance with ITTOIA 2005/ s.465 (3) where the person who created the trust – the “settlor” – is not an “absent” person, the chargeable gain will be assessed on him or her.

The person who created the trust is “absent” if:

• He/she is not UK resident for the tax year in which the chargeable gain(s) arise, or
• He/she died in a tax-year prior to that in which the chargeable gain(s) has arisen

Consequently, if the chargeable gain arises in a tax-year in which the settlor is deemed not to be“absent”, the gain(s) will be added to his/her other taxable income to assess if any tax is due on the gain(s) itself. For the purpose of this assessment, top-slicing relief can be claimed. If any tax is actually paid as a result of this assessment, either by the settlor or his / her estate, it can be reclaimed from the trustees by virtue of ITTOIA2005/s.538. Should any tax so paid not be reclaimed (either by the settlor or his/her estate) then, to the extent that the amount of tax paid but not reclaimed exceeds any available annual exemption, the settlor will be treated as having made a chargeable transfer to the trust.

Note, this would also be the case where despite not having to pay any tax in relation to the assessable gain, the settlor has paid more income tax overall for the tax-year concerned due to loosing some/all enhanced age allowance due to the addition of the non top-sliced chargeable gain to their other taxable income.

It should be noted that a chargeable gain arising from the payment of the settlor’s retained rights under a Legal & General Discounted Gift Scheme would be assessed on the settlor in his capacity as absolute beneficiary of the bare trust under which his retained rights are held. As a consequence, the settlor will have no right to reclaim from the trustees any tax he / she pays as a result of such an assessment.

However, if the settlor has had to pay tax as a result of being assessed on a chargeable gain that has arisen from the operating of the trust, e.g. the trustees surrender one or more individual policies so as to release funds in order to pay an IHT 10 year anniversary charge, the settlor can claim reimbursement under ITTOIA/s.538

Where there are two or more settlors the chargeable gain will be apportioned between them in such percentages as they each contributed funds to the trust. Each will then be assessed to tax on their respective share as described above.

Where the settlor(s) is an “absent” person as described above and the trustees are UK resident then, in accordance with ITTOIA2005/s.467 the trustees are liable and so the gain(s) will be assessed to tax at the trust rate for the relevant tax year.

Since top-slicing relief is not available for trustees then, to the extent that the chargeable gain when added to other gross non-savings & savings income of the trust (in the relevant tax-year) exceeds the trust’s available standard rate income tax band (up to a maximum of £1,000), the chargeable gain will be taxed at, currently,  40%. The trustees would have to pay 20% tax (onshore bond) after allowing for the non-reclaimable 20% tax credit to reflect the tax paid within the life fund(s). This tax credit will satisfy the trustees’ liability in respect of that part of the chargeable gain falling within the trust’s available standard rate band (if any).

• If the trustees are non-UK resident for income tax purposes, a UK resident beneficiary will be taxed on that part of any distribution he / she receives from the trust which can be attributed to the chargeable gain realised by the trustees. This “attributable gain” will be treated as an addition to the beneficiary’s income for the tax year in which the distribution is made but without the availability of either top-slicing relief or the 20% tax credit (for onshore bond gains) to lessen any resulting tax liability.