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Where Taxpayers and Advisers Meet

Shielding Trusts from taxation

Matthew P
Posts:72
Joined:Thu Oct 30, 2008 12:46 pm
Shielding Trusts from taxation

Postby Matthew P » Tue Aug 01, 2023 11:09 am

My wife and I have set up two discretionary trusts, one with me as settlor, one my wife as settlor, beneficiaries being spouse, children, and their children, etc.

What to do with the money in them?
1] it could be lent by the Trust to our children. They could use the money profitably to pay down their mortgages, or top up their ISAs. No tax would be payable by the Trust, that I can see, since the Trust is not earning.
2] It could be lent by the Trust to the spouse, and used in the same way. Again, no tax would be payable by the Trust, that I can see.

Are we doing anything wrong?
The Trust could alternatively invest the money, pay tax on the income, pay it to my wife, and my wife (who pays almost no income tax) could recoup the tax paid.

strawn
Posts:96
Joined:Fri Jun 01, 2012 10:11 am

Re: Shielding Trusts from taxation

Postby strawn » Tue Aug 01, 2023 4:16 pm

"My wife and I have set up two discretionary trusts, one with me as settlor, one my wife as settlor, beneficiaries being spouse, children, and their children, etc." Was that what your lawyer advised?

I understand (as an amateur) that in our position (which might be quite different from yours) I'd be wiser to set one up with self and wife as trustees, and with the beneficiaries being my widow (not my spouse!), children, grandchildren, ...

Perhaps a professional might like to comment.

Matthew P
Posts:72
Joined:Thu Oct 30, 2008 12:46 pm

Re: Shielding Trusts from taxation

Postby Matthew P » Tue Aug 01, 2023 6:17 pm

You are right.

My wife and I have set up two discretionary trusts, one with me as settlor, one my wife as settlor, beneficiaries being widow, children, and their children, etc.

What to do with the money in them?
1] it could be lent by the Trust to our children. They could use the money profitably to pay down their mortgages, or top up their ISAs. No tax would be payable by the Trust, that I can see, since the Trust is not earning.
2] It could be lent by the Trust to the widow, and used in the same way. Again, no tax would be payable by the Trust, that I can see.

Are we doing anything wrong?
The Trust could alternatively invest the money, pay tax on the income, pay it to my widow, and my widow (who will pay almost no income tax) could recoup the tax paid.

strawn
Posts:96
Joined:Fri Jun 01, 2012 10:11 am

Re: Shielding Trusts from taxation

Postby strawn » Tue Aug 01, 2023 10:47 pm

Remember that I am an amateur:-

(i) I understand that lending interest-free is OK as long as the terms of the loan determine that the lender (i.e. the trustees) can call back the loan with immediate effect.

(ii) If you are searching for a good investment for the trust just at the moment Index-Linked Gilts might fit the bill. You can buy them with an income yield that's very low because the gains will come as tax-exempt capital gains. If the trust income is less than £500 p.a. (from tax year 24/25) then there's no income tax for the trustees to pay nor any need to report the income. In this tax year the magic number is £222 p.a. and it applies solely to interest i.e. not dividends. What ILGs pay is classed as interest.

(iii) Point (ii) assumes that your trust is written so that the trustees need not diversify their investments. Though from 24/25 a bit of diversification might still be compatible with avoiding the hassle of tax returns.

(iv) And that's quite enough from a self-taught amateur.

AGoodman
Posts:1793
Joined:Fri May 16, 2014 3:47 pm

Re: Shielding Trusts from taxation

Postby AGoodman » Wed Aug 02, 2023 11:30 am

An important question for you. Why have you set up these trusts? what are you trying to achieve?

Matthew P
Posts:72
Joined:Thu Oct 30, 2008 12:46 pm

Re: Shielding Trusts from taxation

Postby Matthew P » Wed Aug 02, 2023 1:09 pm

I have more than £1 million in total assets. My children are not rich, and my widow will not have much income. It makes sense to move some of the assets to them and take advantage of the 7 year rule.


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