The current remittance basis tax regime will be replaced by a residence based regime from 6 April 2025.

Foreign Income And Gains

Existing non domiciled individuals who have been resident in the UK for less than 4 years will be able to take advantage of the new scheme which provides for tax free foreign income and gains for up to the first four years of residence.

Longer term UK residents (greater than four years) will have to pay tax on all foreign income and gains from 6 April 2025.  However, transitional arrangements will mean that:

• For the 2025/26 tax year they will only pay UK tax on 50% of their foreign income arising in that year;
• Foreign income and gains arising before 6 April 2025 will be able to be remitted to the UK in the 2025/26 and 2026/27 tax years at a temporary 12% tax rate;
• Foreign assets will be able to be re-based to 5 April 2019 value for disposals after 6 April 2025
• Foreign income and gains arising on non-resident settlor interested trusts will not be taxed unless the income and or gains are paid to UK residents.

Overseas Workdays Relief

Non-UK domiciled individuals are currently able to claim tax relief for earnings from duties overseas for up to three years of UK residence – subject to not remitting the funds to the UK.

The Government is to consult on reforming the current regime.  However, it has been confirmed that the basic relief will remain, but the restriction on remittance will be removed.  This will be a welcome simplification for many.

Inheritance Tax

The Government will consult on changes to the inheritance tax regime in light of removing domicile and changing to a residence based regime.

However, to provide certainty, they have confirmed that the treatment of non-UK assets settled into a trust by a non-UK domiciled settlor prior to April 2025 will not change. 

Summary

It is clear that the Government’s intention is to encourage capital inflows into the UK rather than provide disincentives to do so.

However, many long term non domiciled UK residents will be significantly impacted from 6 April 2025 – although the 50% restriction on income and gains subject to tax for that year will be a welcome relief.

Less clear is the position around inheritance tax.  We would welcome clarification in this regard at the earliest opportunity.

Richard Feakins, Director of CST London, recently contributed to an article on the Australian Financial Review – UK’s new tax slug could force expat Aussies home – read Richard’s contribution here.

What are the tax consequences of arriving in the United Kingdom and becoming tax resident?

Once considered a tax resident of the UK, under the new Statutory Residence Test (SRT), which took effect from 6 April 2013, an individual is then taxable on worldwide income.

Different income tax rules apply, based on the nature of the source of income, e.g. immovable property income, trading and professional income, investment income, dividend income, foreign income and employment income.

The rental value of a residence is generally not subject to tax. However, with effect from 1 April 2013, an annual tax on enveloped dwellings (ATED) applies to certain non-natural persons owning UK property valued at more than GBP 500k.

What is the minimum time I can remain in the United Kingdom without being tax resident?

The minimum time you can remain in the United Kingdom without being a tax resident is generally under 183 days in a single tax year or under 91 consecutive days if you have a home in the UK (and no other home overseas), or where you spend less than 30 days in a another home overseas.

Does the United Kingdom tax its residents on a world wide or territorial basis?

Yes, the United Kingdom does offer the choice to be taxed on a remittance basis. If the foreign income and/or gains that you leave outside the UK in a tax year are more than £2,000 and you want to pay tax on the remittance basis you must complete a Self-Assessment tax return at the end of the tax year. If the foreign income and/or gains that you leave outside the UK in a tax year are £2,000 or less, you can use the remittance basis without making a claim or completing a Self-Assessment return.

If you do not choose to be taxed on the remittance basis, you will automatically be taxed on the ‘arising’ basis.

Is foreign income taxable in the United Kingdom e.g. foreign rental income, foreign interest income and foreign dividend income?

Foreign-source dividends, interest, royalties and rental income are, in general, fully taxable, subject to the remittance basis of taxation for foreign domiciliary. However, stock dividends from a non-resident company are not taxable.

Does the United Kingdom tax on a remittance basis?

Yes, the United Kingdom does offer the choice to be taxed on a remittance basis. If the foreign income and/or gains that you leave outside the UK in a tax year are more than £2,000 and you want to pay tax on the remittance basis you must complete a Self-Assessment tax return at the end of the tax year. If the foreign income and/or gains that you leave outside the UK in a tax year are £2,000 or less, you can use the remittance basis without making a claim or completing a Self-Assessment return.

If you do not choose to be taxed on the remittance basis, you will automatically be taxed on the ‘arising’ basis.

Does the United Kingdom have a sales tax or VAT tax on purchases?

Yes, there is a standard Value Added Tax (“VAT”) applicable in the UK of 20%.

Does the United Kingdom have a capital gains tax that taxes me when I sell foreign assets?

An individual who is resident in the United Kingdom is subject to capital gains tax (CGT) on worldwide capital gains (subject to the remittance basis of taxation for foreign domiciliary).

Capital gains tax is levied as follows:
– at 18% on gains up to the limit of the taxpayer’s available basic rate band; and
– at 28% on gains in excess of that limit.

For 2020/21, the basic rate limit is GBP 37,500. Capital gains effectively form the top slice of a taxpayer’s income. If a taxpayer already has taxable income up to the amount of the basic rate band, any chargeable gains he has will be taxed at 28%. If, on the other hand, his taxable income does not reach the basic rate band limit, he is taxed at 18% on such an amount of gain as would use up the basic rate limit. Any gains in excess of that limit then attract tax at 28%. The first GBP 12,300 (2020/21 rate) of gains made in a year by an individual are exempt.

Temporary non-residents
Gains of a temporary (i.e. up to 5 years) non-resident from the disposal of assets held before becoming non-resident can be assessed on him in the year of return to the United Kingdom.
There is no liability to capital gains tax on disposals by a non-resident, even of UK situate property. The exception to this rule is where the property is used for the purposes of a trade, profession or vocation being carried on by a branch or agency situated in the United Kingdom.

Does the United Kingdom have an estate tax or death tax?

The UK has an inheritance tax which is charged on the transfer of all property passing on death (chargeable transfers).

No general gift tax exists, but inheritance tax is also levied on certain gifts made within the 7 years before the death of a person (potentially exempt transfers). The scope of inheritance tax is further extended by the inclusion of gifts made outside such 7-year period, but from which the deceased has not been entirely excluded for the past 7 years prior to death (gifts with reservation). Certain transfers inter vivos are taxed at the moment of the transfer (lifetime transfers).

An income tax charge is imposed on the annual value of any benefit exceeding £5,000 derived by individuals from the use or enjoyment of assets that they previously owned. The charge is determined as a percentage of the value of the asset. The relevant percentage is the official interest rate, which HMRC gives as 2.25% for 2020-2021. The taxpayer can opt out of the income tax charge by electing for the asset concerned to be subject to the inheritance tax rules.

What is the top tax rate in the United Kingdom?

As at the 2020/21 Tax Year, the top tax rate in the UK is 45 per cent (applicable to individuals with income in excess of £150,000 per annum) plus National Insurance.

Does the tax rate vary for different types of income and if so what are the rates?

Bracket (GBP) Rate (%)
Dividend Savings Other income
Up to 2,880 10 [1] 10[1] 20[1] 2,881 – 31,865 = 10 20 20
31,866 – 150,000 = 32.5 40 40
Over 150,000 = 37.5 45 45

What are the common tax deductions available in the United Kingdom?

Interest paid by an individual is allowable as a general deduction from income if it is:
– loan interest, whether annual interest or not, but excluding interest on a bank overdraft; and
– for a qualifying purpose.

Qualifying purposes include:
– the acquisition of 5% or more of the share capital of a close trading company;
– a loan to or the acquisition of any shares in a close trading company if the borrower is involved for the greater part of his time in the conduct of its business;
– the acquisition of shares in an employee-controlled company;
– the acquisition of an interest in a partnership; and
– the acquisition of machinery or plant (for instance, a motor car) for use in a partnership or employment.

Insurance premiums
Premiums paid to pension plans are deductible, subject to statutory limits.

Donations
An individual may obtain tax relief on gifts.

Does the United Kingdom require joint tax returns to be filed for me and my spouse or are separate tax returns required?

The United Kingdom requires that separate tax returns for yourself and your spouse are filed.

If I have a foreign company or foreign trust before I arrived in the United Kingdom is the income of that company or trust taxable?

Gains of a foreign company that would be a closely controlled company were it resident in the United Kingdom may be attributed to and assessed on a resident individual shareholder if the individual has an interest of at least 25% (related through a chain of any number of non-resident companies) in the foreign company making the gain.

An exemption applies for gains on the disposal of assets used for the purposes of “economically significant activities” carried on wholly or mainly outside the United Kingdom. There is also an exemption for cases where neither the acquisition nor the disposal of the asset formed part of arrangements for avoiding tax.

Gains of a foreign trust may, in certain circumstances, be assessed on a resident and domiciled settlor or beneficiary. Such assessment may be precluded if the United Kingdom has a tax treaty with the residence country of the foreign company or trust.

Do children under 18 pay a higher rate of tax on certain types of income?

No. Children pay tax at the tax rates applicable above, as adults.

Is there a gift tax in the United Kingdom?

As discussed above, no general gift tax exists, but inheritance tax is also levied on certain gifts made within the 7 years before the death of a person (potentially exempt transfers). The scope of inheritance tax is further extended by the inclusion of gifts made outside such 7-year period, but from which the deceased has not been entirely excluded for the past 7 years prior to death (gifts with reservation). Certain transfers inter vivos are taxed at the moment of the transfer (lifetime transfers).

What are the personal tax exemptions in the United Kingdom e.g. a gift from an overseas relative or a foreign insurance payout?

The main types of income exempt from tax are:

– UK or foreign alimony received under a post-14 March 1988 court order, or under a pre-15 March 1988 court order where an election has been made by the payer, in effect, for exemption to apply; and
– income received under a post-14 March 1988 deed of covenant, such as a payment to a separated spouse.

If I receive shares as part of my salary is this taxed in the United Kingdom?

In general, employees acquiring shares in their employer company under a beneficial scheme are subject to income tax on the benefit obtained, i.e. the difference between the market value and the issue price. This rule applies whether or not the employee acquires shares directly or through stock options. However, there are several different schemes under which a charge to income (and capital gains) tax may be deferred or avoided altogether. The UK tax position in this area is highly complex.

When I leave the country is a ‘termination payment’ taxed by the United Kingdom before I leave?

Yes, if the termination payment is made in relation to an employment performed in the United Kingdom.

What are other tax consequences of leaving the country?

An individual who is found to be UK resident under the Statutory Residence Test will be treated for tax purposes as resident for the full tax year. However, where an individual leaves the UK part way through a tax year, the tax year is treated as split, with the result that the individual would be treated as UK resident for one part of the year, and non-UK resident for the remaining part.

Unrealized capital gains are not taxed upon emigration. The act of leaving the United Kingdom and ceasing to be resident does not constitute a deemed disposal of assets for UK capital gains tax purposes resulting in a gain; however, in certain circumstances, for example, where tax has been deferred on held-over capital gains, a charge may arise at that point.

If you do not declare a capital gain on the assets in the year that you cease being a resident of the United Kingdom, it will be assumed by the Australian authorities that you have elected to defer the taxation point.

Are there any tax consequences of me transferring money from the United Kingdom to my say home country?

Income and gains which have been previously taxed in the UK are not subject to further tax when being transferred to a home country.

There is no charge to capital gains derived by non-residents from the disposal of assets in the United Kingdom, except where the taxpayer is carrying on a trade in the United Kingdom through a branch or agency and the assets are used, held or acquired for the purposes of the trade.

As stated above, non-residents are currently not subject to capital gains tax, except, broadly, on the disposal of trade asset

CGT Proposals

Details of the plans to impose Capital Gains Tax on gains arising to non-UK residents on the disposal of UK residential property have been published.

The proposals are wider than anticipated and also have unexpected consequences for UK resident second home owners.

CGT will be charged on gains accruing from April 2015 to non-resident individual owners, trusts, companies and partners on disposals of residential property regardless of the value of the property.

CGT will also be levied on gains arising on the disposal of investment properties, in contrast to the Annual Tax on Enveloped Dwelling (ATED) regime introduced in April 2013.

The tax payable by non-corporate sellers will be at the normal CGT rates (18% or 28%) with the benefit of the annual CGT exemption (£11,100 for 2015/16) and, if applicable, principal private residence relief (PPR).

A surprising aspect of these proposals is that both UK and non-UK resident owners of multiple homes may, in future, be denied the ability to elect which of their homes should benefit from PPR.

Instead, only the property which is, as a matter of fact, a taxpayer’s main residence or the property that qualifies as such in accordance with a proposed new fixed rule would be eligible for relief.

The rationale behind this is a concern that, if PPR is available on the sale of a non-resident’s home, the non-resident can simply elect their UK home as their main residence (rather than their non-UK property on which no CGT is payable).

Nevertheless, the proposed extension of this change to UK residents is unexpected.

That said, the Government’s dislike of “flipping” is well known and, to this end, the final period of ownership exemption for PPR has already been reduced from 36 months to 18 months for disposals on or after 6 April 2014.

The new proposals also suggest a new method of collecting CGT.

The detail here is sketchy but the idea is that non-resident sellers would have an option either to pay the tax due themselves or have the tax collected by withholding (carried out by the solicitor acting for the purchaser).

The tax would have to be paid within 30 days of completion, this could be quite onerous for the purchaser’s solicitors and it would further complicate the conveyancing process.

The application of the new CGT charge to disposals by non-resident companies will be more convoluted. Companies paying ATED will pay the related CGT charge on all or part of the gain at the usual rate of 28%.

By contrast, all other non-resident companies will be subject to a tailored CGT charge at a rate to be confirmed.

Enveloped properties

Another unexpected announcement in the recent Budget was the immediate extension of 15% SDLT to corporate purchasers of residential properties worth more than £500,000, (previously £2million).

The scope of ATED will be similarly extended but not with immediate effect. From 1 April 2015 a new band of ATED will apply, with an annual charge of £7,000 on residential properties worth more than £1m but less than £2m.

From 1 April 2016 residential properties worth between £500,000 and £1m will be charged £3,500.

The bands will otherwise remain unchanged and the current reliefs/exemptions (including those for commercially let residential property and development and trading businesses) will continue to apply.

The ATED related CGT charge will be extended from 6 April 2015 to properties worth more than £1m and will apply to that part of the gain that accrues on or after this date; and to properties worth more than £500,000 from 6 April 2016.

The balance of the gain will be treated as at present and, where the company is non-resident and part of the gain is not ATED related, the latter may also be subject to the proposed new tailored charge from April 2015.

A Mansion Tax?

Press speculation about a mansion tax grows ever more fevered whilst actual proposals remain elusive. That said, both ATED and the new CGT proposals described in this Newsletter illustrate how soft a target property is and house price inflation will surely tempt our politicians further.

Current possibilities, whether from academics or politicians, include: a progressive property tax (on houses but with relatively low values); increasing Council Tax on dwellings worth over £2m, being the latest idea from Danny Alexander; and a far more radical land value tax which would apply to all types of land.

The debate seems likely to intensify between now and May 2015. We are monitoring developments and will publish specific briefings as soon as there is something concrete to report.

Other Budget news

• Pensions: Far reaching reforms were announced to remove the requirement to purchase an annuity from pension funds and to relax the tax charges that apply to the withdrawal of funds. Some transitional measures were introduced on 27 March but the full reform will take effect from April 2015 following consultation.
• Savings: From 1 July 2014, the ISA will become a “new ISA” (NISA) with a limit of £15,000 for 2014/15 and will be able to hold any combination of cash and shares. From the same date both the Junior ISA and child trust fund limit will also rise to £4,000. From 1 June 2014, the premium bonds subscription limit will rise to £40,000; it will rise again to £50,000 in 2015/16.
• The IHT debt rules introduced from April 2013 will be amended so that foreign currency bank accounts will be treated as if they were ‘excluded property’. Therefore a liability (whenever incurred) will be disallowed for IHT purposes if borrowed funds have been deposited in a foreign currency account in a UK bank (either directly or indirectly) in respect of deaths after the date of Royal Assent of Finance Bill 2014.
• IHT Exemptions: The Government will consult on extending the existing IHT exemption for members of the armed forces who die on active service to all emergency service personnel who die in the line of duty.
• CGS: The annual cap on the total tax deductions that can be claimed under the Cultural Gift scheme & Acceptance in Lieu (for donations of pre-eminent objects to the nation) has been increased to £40m with effect from 6 April 2014.
• Accelerated tax payments: As from Royal Assent of the Finance Act 2014 HMRC will be able to require taxpayers who have used a tax avoidance scheme to make an accelerated tax payment where it considers that there is judicial ruling which has defeated the same (or a similar) scheme.

Similarly, taxpayers will be required to pay disputed tax ‘up front’ if they have claimed a tax advantage by the use of arrangements that fail to be disclosed under DOTAS; or where HMRC invokes the GAAR.

• The Government is consulting on some potentially quite alarming proposals to allow HMRC to seize money from bank accounts from anyone who owes more than £1,000 in tax or tax credits, although this will apparently be subject to certain safeguards.
• Charity definition: HMRC is proposing to amend the definition of charity for tax purposes by introducing a new ‘purpose of establishment condition’.

This aims to prevent charities being set up to abuse charity tax reliefs and is not intended to catch genuine charitable organisations.

However one of the proposed tests would deny charitable status for tax purposes if one of the main purposes for which it was established was to secure a tax advantage.

This could potentially impact on private and corporate charitable foundations as it is arguable that one of their main purposes is to obtain a tax advantage such as Gift Aid and other reliefs on donations.

Inheritance tax news

• Revised proposals to divide the nil rate band available to trusts between all trusts created by the same settlor will be published later this year and legislation introduced in Finance Bill 2015.
• The National Audit Office is launching an investigation into the possible misuse of agricultural and business property relief from IHT, as their use has almost doubled in five years.
• The Conservative Party have indicated they would consider raising the IHT nil rate band to £1m, should they be re-elected.

FATCA’s impact on trusts

The UK and US government have reached an agreement to implement a US law, the Foreign Account Tax Compliance Act (FATCA) in the UK. FATCA was designed to combat tax evasion by US residents using foreign accounts and it requires institutions outside the US to pass information to US tax authorities. A surprising range of institutions are affected by FATCA including some private trusts.

Corporate trustees and trusts which delegate the management of investment portfolios will generally need to register with the IRS by 25 October 2014, in the latter case if more than 50% of their income derives from investments.

Alternatively they may be able to enter into an agreement with a third party (e.g. the investment manager) to register on their behalf.

Thereafter they must report any US connections annually to HMRC, who will pass the information on to the IRS.

Other trusts will not need to register but may have annual reporting requirements if they have any US beneficiaries, trustees, protectors or settlors.

All trustees should consider their status and obligations under FATCA as soon as possible. For full details please see our flyer entitled ‘FATCA: What trustees need to know.’

Public register of beneficial owners

It has been clear since last November that companies will be required to make greater disclosure of their beneficial owners, but it had been assumed that trusts would be excluded as David Cameron has argued that they should be treated differently.

However, the European Parliament has recently approved an amendment to the Fourth Money Laundering Directive, which will, if implemented, make information about the individuals behind trusts publicly available for the first time.

Each EU member state would have to keep and make available a public register listing the ultimate beneficial owners of privately owned companies, foundations and trusts. There would be provisions to protect data privacy and to ensure that only the minimum information necessary is on the register.

Whilst it is appreciated that greater transparency may help to prevent criminal activity and tax evasion, many feel that these proposals go beyond what is required to achieve this aim.

Although they do seem rather worrying, they are still at a relatively early stage: final negotiations within the EU on the Directive will not begin until later this year and then each individual Member State has to incorporate the result into domestic law before the provisions take effect.

Further, the UK government has confirmed that it will oppose the mandatory registration requirement for all trusts and will seek to negotiate a compromise.

Same Sex Marriages

Since the Marriage (Same Sex Couples) Act 2013 came into force on 13 March 2014, same sex couples are able to marry in England and Wales. Civil partners should also be able to convert their legal relationship to a same sex marriage later this year, once the mechanism to do this has been introduced.

The intention is that same sex marriages should have virtually identical tax and legal consequences and effects to opposite sex marriages.

Therefore, from 13 March 2014 all legislation using marriage terminology will be read as encompassing both same sex and opposite sex marriage. The default position for interpreting legal instruments will depend upon whether or not that instrument was in existence on 13 March 2014.

Pre-existing private legal instruments will generally be read as referring only to opposite sex marriages; and new instruments from that date will be read as encompassing both opposite and same sex marriages. The position may be reversed by inclusion of specific provisions to the contrary.

Art used in a business

The Court of Appeal has confirmed that a painting used in Castle Howard’s house opening business was a wasting asset which attracted no CGT on its disposal, upholding the Upper Tribunal decision covered in our newsletter last Spring (HMRC v The Executors of Lord Howard of Henderskelfe [2014] EWCA Civ 278).

The painting in question was not owned by the business operator, but informally permitted to be used in the business, and the Court of Appeal has confirmed that the CGT legislation does not limit the exemption to assets owned by the trader.

This is potentially a very useful decision but it may not be relevant to many cases because the CGT exemption does not apply if capital allowances have or could have been claimed on the asset. It is also possible that the law could be changed.

This Publication provides general advice only is should not be relied upon when making decisions. Neither CST nor any other professional in the firm has prepared this with a view to covering any client scenario and this document is not a substitute for professional advice. It has been prepared in conjunction with firm of Boodle Hatfield see www.boodlehatfield.com

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Disclaimer:
This document is intended as an information source only. The comments and references to legislation and other sources in this publication do not constitute legal advice and should not be relied upon as such. You should seek advice from a professional adviser regarding the application of any of the comments in this document to your fact scenario. Information in this publication does not take into account any person’s personal objectives, needs or financial situations. Accordingly, you should consider the appropriateness of any information, having regard to your own objectives, financial situation and needs and seek professional advice before acting on it. CST Tax Advisors exclude all liability (including liability for negligence) in relation to your reliance in this publication.

1. What Is A Trust?

• Trustee;
• Trust Property;
• Equitable Obligation;
• Beneficiaries;

To restate the above in slightly more legalistic terms “a trust is a fiduciary relationship where one person, a trustee, holds an interest in property but has an equitable obligation to use or keep that property for the benefit of another person(s) (beneficiaries) for some committed object or purpose.

There are many types of trusts, however the common ones are:

• Express Trusts;
• Settled Trust;
• Discretionary Trusts;
• Unit Trust;
• Will Trust;

Express Trusts

Are trusts created by the express and intentional declaration of the settlor. Trusts dealt with in practice usually evidence this declaration by way of a formal trust deed.

Settled Trust

One form of an express trust is a settled trust created by settlor (or director). The settlor will intentionally create a trust by gifting the initial trust property to be held on trust by a trustee under an equitable obligation.

The most common trusts we implement are a discretionary trust, unit trust and a will trust (or deceased estate).

Discretionary Trust

A common settled trust dealt with in practice is a discretionary trust. A discretionary trust, which may also be known as a family trust, allows the trustee (who is usually the head of the family) to exercise discretion on an annual basis as to which beneficiaries will receive a distribution and to what extent each beneficiary shall benefit.

Unit Trust

Unit trusts are commonly used when arms length parties wish to enter into a commercial undertaking together.

Each party’s entitlement to income and capital from the trust is proportionate to the units held.

Will Trust

A will trust or a deceased estate arises on the death of a person. Upon death, property of the deceased passes to his or her estate.

The fiduciary obligation to administer the estate and the assets therefore falls upon the executor or administrator who assumes the role of trustee in respect of the property of the deceased estate.

The beneficiaries of a deceased are those nominated in the Will of the deceased.

2. Why Choose A Trust?

3. How Do You Set Up A Trust?

If you have made the decision that a trust is an appropriate structure the next step is to establish a trust.

Approaching a Solicitor

Prior to approaching a solicitor you should not only have considered the commercial and taxation issues noted previously, but you should also have determined:

• The purpose and activities of the trust;
• Nominated beneficiaries and future beneficiaries;
• Who is to be the trustee and settlor;

Review and Understanding

The solicitor will draft the trust deed in accordance with the client’s requirement and at this stage it is critical that a thorough review is done to ensure that the trust deed (or governing rules) reflects your commercial and legal requirements and allows flexibility for future contingencies.

If a solicitor who specialises in trust law is consulted you will often receive an information booklet setting a basic outline of a trust for administration purposes.

At this stage also it is critical that you read through the draft deed and that questions are addressed prior to creating the trust. In this regard the family or business solicitor (if he or she did not draft the deed) may be used to add his/her comments and to provide a different perspective and extra level of comfort to both the client and accountant.

4. Parties To A Trust

The Settlor

The Settlor is the person who brings the trust into being.

Typically the settlor is a family friend or business associate who will contribute initial capital to settle the trust.

For Australian tax purposes it is important that there is not any reimbursement by the trustee in respect of distributions made for children under 18 years old if a parent, who will usually act as trustee or a director of the trustee company of a family trust, settles or creates the trust.

It is also advisable that the advisers to the trust are not the Settlor, for the reason that many trust deeds contain clauses that the Settlor is excluded from any benefit or income under the trust.

The Trustee

A Trustee is the person who holds an interest in trust property for a committed trust object or purpose.
In a discretionary trust situation the trustee exercises control over trust property so the trustee can deal with it on behalf of beneficiaries.

The choice of a trustee is worth proper consideration for the reason that the trustee’s powers and duties are significant. In that regard the person who is appointed to the position must understand his/her role and responsibilities.

Trustees may be individuals but more commonly will be companies to limit liability.  In a family trust a parent or both parents will usually act as directors of a corporate trustee.

The Appointor or Protector

The Appointor or Protector is the person or persons who have the authority under the trust deed to appoint or remove the trustee of the trust. As such the appointor is often said be the controller of the trust.

Many trust deeds empower the appointer to remove the trustee and appoint a new trustee at any time in writing.

Unless specified in the trust deed or in the will of the Appointer, on the death of the Appointor, the legal personal representative of the deceased Appointer will become the Appointor.

Income Beneficiaries

These are beneficiaries who may at the discretion of the trustee receive entitlement to trust income. Most modern trust deeds are drafted very widely in this area to give the trustee very wide discretionary powers for the advantage of flexibility of distribution for taxation purposes. Common classes of beneficiaries are:

• Family members, including children;
• Unborn children of family members such as direct lineal descendants;
• Eligible entities in which the abovementioned beneficiaries of the trust itself has an interest (such as a corporate beneficiary)

Capital beneficiaries

These are beneficiaries who are entitled to the corpus of the trust or the capital in the trust.
This entitlement does not usually arise until vesting day, or the day the trust is to be wound up, but entitlements to capital or corpus of the trust may occur earlier if permitted by the trust deed or agreed to by all beneficiaries.

Default Beneficiaries

A default beneficiary is simply the beneficiary to whom a distribution may default to in the absence of any other nominated beneficiary.
For example should an amended assessment be raised increasing assessable income that income will be distributed primarily in accordance with the relevant trustee’s distribution minute.

However in the absence of any guidance contained therein or in the event the resolution or minute cannot be located or was not made for the reason there was considered to be no income, the distribution may revert to the default beneficiary rather than be assessed in the hands of the trustee at the top marginal rate.

There are very few restrictions on who may be a beneficiary.  A beneficiary may be a resident or non-resident natural person (such as a company) or any legal entity.
Further, persons who have not yet been born or legal entities that have not yet come into existence may subsequently become beneficiaries.  However it is important to nominate who will be and who can become a beneficiary on drafting of the deed.

A trust, as stated above, is a fiduciary relationship.

The adding of unanticipated beneficiaries at a later stage may, in a worst case scenario, lead to a resettlement of a trust or the ceasing of the former relationship and creation of a new relationship, being the creation of a new trust.

Should there be considered to be cessation of one trust and the creation of a new trust, a myriad of unwelcome income tax, capital tax and stamp duty issues may arise.
Thus, upon reviewing the deed detailed consideration must be given to who and who might potentially become income, capital and/or default beneficiaries.

Contact us

Should you be interested in discussing further how a trust may suit your purposes please do not hesitate to contact us at our offices.

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Disclaimer:
This document is intended as an information source only. The comments and references to legislation and other sources in this publication do not constitute legal advice and should not be relied upon as such. You should seek advice from a professional adviser regarding the application of any of the comments in this document to your fact scenario. Information in this publication does not take into account any person’s personal objectives, needs or financial situations. Accordingly, you should consider the appropriateness of any information, having regard to your own objectives, financial situation and needs and seek professional advice before acting on it. CST Tax Advisors exclude all liability (including liability for negligence) in relation to your reliance in this publication.