The

tax A tax is a compulsory financial charge or some other type of levy imposed on a taxpayer (an individual or legal entity) by a governmental organization in order to fund government spending and various public expenditures (regional, local, or n ...

ation of

trusts A trust is a legal relationship in which the holder of a right gives it to another person or entity who must keep and use it solely for another's benefit. In the Anglo-American common law, the party who entrusts the right is known as the "settl ...

in the

United Kingdom The United Kingdom of Great Britain and Northern Ireland, commonly known as the United Kingdom (UK) or Britain, is a country in Europe, off the north-western coast of the continental mainland. It comprises England, Scotland, Wales and North ...

is governed by a different set of principles to those tax laws which apply to individuals or

companies A company, abbreviated as co., is a legal entity representing an association of people, whether natural, legal or a mixture of both, with a specific objective. Company members share a common purpose and unite to achieve specific, declared go ...

Inheritance tax

The inheritance tax ("IHT") treatment of trusts was substantially revised by the

Finance Act 2006 The Finance Act 2006 (c 25) is an Act of the Parliament of the United Kingdom prescribing changes to Excise Duties; Value Added Tax; Income Tax; Corporation Tax; and Capital Gains Tax. It enacts the 2006 Budget speech made by Chancellor of the E ...

, with effect from 22 March 2006. The possible types of trust which can now exist for inheritance tax purposes are set out in the table below: Notes: #An "interest-in-possession" means that a specific beneficiary has a right to the current

income Income is the consumption and saving opportunity gained by an entity within a specified timeframe, which is generally expressed in monetary terms. Income is difficult to define conceptually and the definition may be different across fields. For ...

of the trust. #The spouse exemption exempts from tax any assets passing between spouses and civil partners. Relevant property trusts are taxed: *On creation: **If the trust is created ''

inter vivos Inter vivos (Latin, ''between the living'') is a legal term referring to a transfer or gift made during one's lifetime, as opposed to a testamentary transfer that takes effect on the death of the giver. The term is often used to describe a trust e ...

'' (i.e. during the settlor's lifetime): ***It is taxed at half of the current death rate for IHT. The death rate is 40%, and the 2012/13 IHT "nil-band" is £325,000. Therefore, if the settlor has made no gifts and settled no trusts in the seven years prior to settling a trust in 2012/13, it would be taxed at nil rate (0%) on the first £325,000 and 20% on the balance. ***If the settlor dies within seven years of the settlement, the initial 20% charge will be recalculated as if it were a

PET A pet, or companion animal, is an animal kept primarily for a person's company or entertainment rather than as a working animal, livestock, or a laboratory animal. Popular pets are often considered to have attractive appearances, intelligence, ...

, and if that is more than the tax already paid, the balance will be due (but there is no repayment if the recalculation produces a lower result). **If the trust is created on death (i.e. a

testamentary trust A testamentary trust (sometimes referred to as a will trust or trust under will) is a trust which arises upon the death of the testator, and which is specified in their will. A will may contain more than one testamentary trust, and may address a ...

) it will usually suffer IHT at creation under the normal rules, because of the death. There is therefore no need for the trust to be taxed separately on creation. *To "ten-year charges", on each tenth anniversary of the settlement (or of the date of death, in the case of a testamentary trust). The rate is 6% on the value of the trust's assets exceeding the nil-band at that time. *To "exit charges" when money leaves the trust: most usually by

appointment Appointment may refer to: Law *The prerogative power of a government official or executive to select persons to fill an honorary position or employment in the government (political appointments, poets laureate) * Power of appointment, the legal ...

to a beneficiary. Simplifying a little, the rate of IHT is that proportion of what the next ten-year charge would have been, that the time which has elapsed since creation or the last ten-year charge bears to ten years. The interest-in-possession treatment, since 2006, applies only to some trusts with an interest-in-possession (as defined above). Where it applies, such trusts are taxed by attributing the trust's value to the beneficiary who is currently entitled to the income. Accordingly: *On creation: **In the rare cases where they can be created in lifetime they are taxed as

PETs A pet, or companion animal, is an animal kept primarily for a person's company or entertainment rather than as a working animal, livestock, or a laboratory animal. Popular pets are often considered to have attractive appearances, intelligence, ...

. **They are taxed as part of the death estate, when created by will. A spouse exemption is available where the interest-in-possession beneficiary is a spouse or civil partner of the deceased. *On termination ''(i.e. termination of the interest-in-possession, which may, or may not, be the termination of the trust)'': **The value of the trust's assets is taxed at death rates upon the death of the interest-in-possession beneficiary. It aggregates with that beneficiary's estate, and the trust and the estate share the nil-band between them, in proportion to their values. **The value of the trust's assets is taxed as if it were a "

" where the beneficiary's right to receive income ceases in his or her lifetime. :''Source: Schedule 20 Finance Act 2006.'' {{DEFAULTSORT:Taxation of Trusts (United Kingdom) Law of the United Kingdom Taxation in the United Kingdom Wills and trusts in the United Kingdom