Trusts are a well-established tool for Inheritance Tax (IHT) planning, widely used to manage and protect family wealth across generations. With more recent changes to the current IHT planning landscape with pensions and reliefs, Trusts may become even more attractive.

Many individuals setting up Trusts understand the IHT benefits and the legal requirements for creating the Trust. However, once the Trust is established, what comes next? Trustees have ongoing responsibilities, particularly concerning tax compliance, and failure to meet these obligations can lead to significant penalties.

Trustee obligations for tax compliance in the UK

Once a Trust is created, trustees must ensure they remain compliant with UK tax laws. Key obligations include:

  • Registering the Trust: Most Trusts must be registered with HMRC’s Trust Registration Service (TRS), especially those with a UK tax liability.
  • Annual tax returns: Trustees may need to submit Self-Assessment tax returns if the Trust generates taxable income or disposes of assets subject to Capital Gains Tax.
  • Income tax compliance: Trusts pay income tax on rental income, dividends, and other sources of revenue, with varying rates depending on the type of Trust.
  • Capital Gains Tax (CGT): If assets are sold within the Trust, CGT may be due, with reporting requirements within 60 days for property disposals.
  • Inheritance Tax (IHT) charges: Some Trusts are subject to periodic IHT charges (every 10 years) and exit charges when assets are distributed.
  • Distributions to beneficiaries: Trustees must deduct and report tax on payments made to beneficiaries, ensuring correct tax treatment.

Key duties of trustees

Being a trustee carries significant legal and financial responsibilities, including:

  • Acting in the best interests of beneficiaries: Trustees must manage Trust assets prudently and fairly for the benefit of all beneficiaries.
  • Record-keeping: Accurate financial and administrative records must be maintained to demonstrate compliance with legal and tax obligations.
  • Engaging professional advice: Trustees should seek legal and tax advice to navigate complex regulations effectively.
  • Ensuring compliance with the Trust deed: Trustees must act in accordance with the terms and intentions of the Trust’s founding document.
  • Reporting to HMRC and beneficiaries: Regular reporting and transparency with both HMRC and beneficiaries are crucial for effective trust management.

What if compliance has been missed?

Trusts can exist for up to 125 years, and with trusteeship often passing from one person to another, it is possible that some compliance requirements have been overlooked. Trust disclosures particularly has become more common in the past few years, primarily with the Trust Register Service (TRS) obligations highlighting the existence of a Trust, which may not have been known. If tax reporting has been missed, there is a process to rectify the situation.

The HMRC disclosure process

If a Trust has not met its tax obligations, trustees should consider making a voluntary disclosure to HMRC. The key steps include:

  1. Review past compliance: Assess what has been missed, including unreported income, CGT liabilities, and IHT charges.
  2. Use the HMRC Digital Disclosure Service (DDS): This allows trustees to report undeclared Trust income and gains, typically under more favourable terms than if HMRC initiates an investigation.
  3. Pay any outstanding liabilities: HMRC will calculate the tax due, including potential interest and penalties, which are often reduced for voluntary disclosures.
  4. Update Trust registration: Ensure the Trust is correctly registered and all necessary filings are up to date.

Failing to disclose can lead to significant penalties. Taking a proactive approach is always the best course of action.

Final thoughts

Trusts are a valuable tool for IHT planning, but ongoing management is crucial to ensure compliance with tax laws and fiduciary duties. Getting things right from the outset is vital. Trustees must be proactive in meeting their obligations to avoid financial penalties and legal consequences. If compliance has lapsed, seeking professional advice and using HMRC’s disclosure facilities can help rectify issues efficiently.

The next step

If you are a Trustee and unsure about your Trust’s tax obligations, seeking guidance from one of our Trust specialists can provide clarity and peace of mind.

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