Workshop: Administering a trust: how safe are your processes?

Trustees have a duty to provide clear and accurate accounts when required to do so by a beneficiary. Proper accounts ensure the right split of capital and income, and support trust tax reporting. Some accountants and solicitors get by with just doing tax returns without accounts, which can be dangerous. Practitioners need to consider carefully who is responsible if something goes wrong, especially with HMRC’s increasing use of penalties in the self-assessment regime.

If HMRC issue an SA900 Trust Return, they will expect it to be returned, whether ‘nil’ or not, by the normal submission deadline. Failure to submit correctly on time results in a £100 penalty, which is no longer removable under the new penalty regime. If you are a trustee or have trust clients, take note, particularly with periodic returns issued every few years to trusts excused from submitting annual returns. Make sure HMRC have the correct name and address for the lead trustee to whom returns would be issued.

If a settlor has created more than one UK resident trust after 7 June 1978, the trust CGT exemption is divided between the trusts up to a maximum of five. A £5,300 annual exemption reduces to a £1,060 minimum per trust where there are five or more. This is regardless of whether there are any gains and includes pilot trusts with only nominal capital amounts and trusts of insurance policies. This is often overlooked so advisers should review their practices to ensure they “know their client”, including the history of trust making.

If a settlor has more than one trust, the £1,000 income tax standard rate band is divided by the number of trusts up to a maximum of five i.e. £200 minimum band per trust.

A positive development arising from the Finance Act 2006 allows revocable entitlements to be granted in discretionary trusts, to simplify reporting requirements for income tax purposes. This allows trustees to deduct 20 per cent income tax and not the punitive 50 per cent. It’s worth reviewing your trusts to consider if this arrangement would work.

Trusts holding only a share of a property occupied by a beneficiary, or pilot trusts for life policies, have often not been set up with HMRC. So practitioners can open a file now and ask to be excused from annual submission. If there is an HMRC file open, are you kept informed by your client/co-trustee when an SA900 is issued? An agent for the trustee can complete an authorising your agent form 64-8 and access details directly via the government gateway.

In the case of the following, have the necessary compliance checks been made fully within the time limits:

? Hold-over elections in or out?

? Capital withdrawn from trusts?

? Deeds/resolutions to support ?payments made? ?

Wherever possible, consider distributions out of a trust before the event. Does the trust document require payments to be made by deed or resolution? What is the impact of making a distribution? If from income, is there a sufficient tax pool? If from capital, will it lead to inheritance tax reporting requirements? To make the payment, will you need to raise funds and will this trigger CGT? If so, is hold-over possible?

To simplify reporting requirements (accounting and taxation), always open and use a trust bank account, where possible, to collect trust income (e.g. mandated to the trust account from the investment managers) and for capital cash transactions. Where there is an income entitlement, a trust account can be used to create a regular payment (based on forecasted net income), enabling income payments to be stopped, increased or decreased promptly as required. This flexibility can avoid problematic income over-distributions.

If there is a property held in trust, is it insured? Check that the trustees’ interest is noted on the policy and ask for a copy of the policy and the renewal schedule each year.

Ensure you maintain trustee minutes, resolutions and so on, to show what has been done and why.