What is a discretionary trust, and when would you use one?

Posted on By Joanna Pegum
woman looking thoughtful

A discretionary trust means trustees have the discretion to decide who benefits from the trust, from a list of potential beneficiaries.

They can also decide when payments are to be made, how much, and how often.

Discretionary trusts are very flexible and can have many uses. For example you might not know how much your beneficiaries might need in the future, so you can leave that responsibility to the trustees.

Personal injury trusts

Another good use for a discretionary trust is a personal injury trust, which can be set up by, or on behalf of, someone who has received compensation from a personal injury claim so that they don’t lose eligibility for their benefits.

Protecting other members of your family

Before 2007, when the law changed, it was common for spouses to make wills leaving the inheritance tax allowance (currently £325,000) to a nil-rate band discretionary trust, so the surviving spouse or civil partner could make use of their allowance after the first spouse died.

While this is no longer necessary, thanks to the transferable inheritance tax allowance between spouses or civil partners, it is useful to include such a trust in your will to provide for other members of the family. If there are assets which are likely to increase in value at a faster rate than the inheritance tax allowance, these could be included in the trust to mitigate inheritance tax on the estate of the surviving spouse/civil partner.

The main disadvantage of a discretionary trust is that any income which is produced from trust assets is taxed at a higher rate of income tax (currently 45%); however, beneficiaries who are basic rate tax payers can claim a tax rebate.

Taxes on trusts

If the value of the trust exceeds the inheritance tax allowance, there may be inheritance tax to pay when any assets are transferred to the beneficiaries (exit charge) and on each ten-year anniversary of the start of the trust (principal charge). The calculations for the exit charge and principal charge are complex, but the rate of tax is lower than the rate of inheritance tax and the maximum rate of tax payable is 6%. See Can I really use a trust to avoid inheritance tax? for more information.

Discretionary trusts are often set up by a will, but they can also be set up during someone’s lifetime. If the gift into trust is under £325,000 and no other gifts have been made, there will be no immediate lifetime inheritance tax charge.

It is worth noting that the inheritance tax residence nil-rate band, which came in to effect in April 2017, cannot be claimed if the deceased’s residence passes into a discretionary trust. This is because it must pass to direct descendants and cannot pass into trust (see What is the Residence Nil-Rate Band? for more information). However discretionary trusts are still useful tools to consider as part of estate and trust planning.

Tina Wong TEP is a Solicitor at Pothecary Witham Weld in London

Do I need to declare my cryptocurrency to HMRC?

Posted on By Joanna Pegum
Attending to paperwork

There is currently widespread uncertainty about the tax treatment of cryptocurrency investments and trading activity.

If you have sold, gifted or spent cryptocurrency within the tax year, you may need to declare any profit or gains on your self-assessment tax return.

If you do not declare taxable income or gains, you may be liable to interest and penalties.

How much tax will I need to pay on my cryptocurrency?

Profits made on cryptocurrencies by individuals is generally subject to capital gains tax at a rate of up to 20% after deducting the annual allowance (£12,300 for the 2020/21 tax year). Where you have bought and sold cryptocurrencies through a UK company, any taxable profits will be subject to corporation tax at a rate of 19%. If you have regularly bought and sold cryptocurrencies, HMRC may say that you are liable to income tax at a rate of up to 45%. Most exchanges will keep a record of your transactions and let you download your history.

If I gift my cryptocurrency, am I liable to tax?

Under existing capital gains tax rules, if you gift your cryptocurrency or use it to buy other capital assets (including exchanging one cryptocurrency for another), you will have to pay tax on any increase in the value of your cryptocurrency between the date you acquired it and the date of the gift or purchase (subject to any available reliefs or allowances). Similar rules apply if you are subject to corporation tax or income tax on your profits.

How will HMRC know about my profits?

HMRC has significant powers to acquire and analyse information on UK taxpayers. If HMRC raises an enquiry into your tax returns, it is likely to question the appearance of profits in your bank account that have not been accounted for. The UK and EU are also currently consulting on new regulations that may require trading platforms to report information on certain account holders to the relevant national authorities.

What if I have made a loss?

If you have made a loss, you may be able to offset these losses against your cryptocurrency profits or other capital/trading profits. If you have bought and sold cryptocurrencies through a UK company and the company has made a loss on any individual transactions, loss relief may be available under the corporation tax loss relief rules. As mentioned above, many exchanges will keep a record of your transactions and let you download your history. It is essential to keep these records on file so that you can claim relief for any losses that you make.

What if I fail to declare any taxable profits?

HMRC has up to 20 years following the end of the relevant tax year to enquire into your tax returns. If you deliberately fail to declare taxable income or gains and tax has been underpaid, you may be liable to interest and penalties of up to 100% of the amount of tax due. In the most serious circumstances, criminal liability may apply.

Where can I get advice?

A qualified professional can provide advice and help you to make the necessary disclosures on your tax return.

Helen Cox is Partner in the Private Client Department at Fladgate, and Andrew Goldstone TEP is a Partner at Mishcon de Reya, London, UK