Do I really need to waste my time on paperwork?

[PeterFau]

I have established a discretionary trust for my two daughters (inheritance from their great aunt). They are 8 & 6 years old. The money is in two savings accounts in their names. I've just found out that every year I need submit a Trusts 7 Estates Tax Return, declare the interest earned, pay tax at whatever rate on it, and then submit R40 Forms to claim it all back again (because the beneficiaries are non-taxpayers). Is there really no way around this? It is a complete waste of my time, the IR time, postage, etc....

[Lee Young]

The simple answer is yes you [the trustees] must go through that entire process.

Th R40s are only relevant if you are paying any income out to the children. If you are not then that will not be needed.

Hopefully you were not the settlor of the fund as otherise this trust is now settlor interested for income tax and capital gains tax purposes.

[Peter D]

Lee is spot on. Are you using a straight cash savings account for this. Depending on the value of the fund this is not the best way and it only just keeps up with inflation in real terms, even without Tax. I assume you have not taken professional advice on this and you are DIY-ing the Trust fund. Regards Peter

[PeterFau]

Yes, I DIYed the Trust Fund. It is set up for my daughters - all interest is paid into the accounts for them. So I want then to get the interest tax free. Seems like I can do this via this stupid "pay-the-tax-then-claim-it-back" R40 process - but what else could I do? The value of each is around 22K by the way.

[bob.fraser@towrylaw.]

It is to avoid this palaver that I generally recommend (except where the interest is actually required to be paid out as it arises) that the investment is made into an investment bond. I have summarised the advantages/disadvantages of investment bonds in a trust for you:

Advantages of investment bonds
 non income producing
 exempt from CGT
 5% cumulative tax deferred allowance
 minimal declaration required under self assessment
 provides investment diversification
 ability to restructure underlying investments without an immediate liability to tax
 reduced trust administration
 ability to access `with-profits' investments
 flexible and competitive costs over the longer term
 trust accounts not normally required/ or simplified
 trustees can assign policy/segments to beneficiaries to allow them to exploit their own marginal rate of tax.
 investment bonds are now an authorised investment following the introduction of the Trustee Act 2000.

Disadvantages of bonds
 cannot use CGT annual exemption (since exempt from CGT)
 non-taxpaying beneficiaries cannot reclaim tax deducted at source if using an onshore bond
 not suitable where there is a need for income interest.

The way to overcome the income restriction (HMRC may view regular withdrawals as income in the hands of the beneficiaries and tax accordingly) is for ad-hoc and irregular lump sum payments to be made from the bonds, such as for Christmas and birthdays.

I totally endorse Peter's comment about inflation. I would not consider putting £22K for each child into a cash account as a wise investment strategy if you wish to have any real growth over the next 10-12 years prior to college or whatever other plans you may have for them.

Bob Fraser
Chartered Financial Planner

[PeterFau]

This is good advice - thanks Bob (and Peter & Lee)!