Parental Trusts for minors
Parental trusts for minors and Income Tax
A parental trust for minors is one where a ‘relevant child’ (a child under age 18 who has never been married or in a civil partnership) of the settlor can benefit from a trust. In this case, the settlor must be one of the child’s parents.
Parental trusts for minors aren’t a type of trust in their own right – they will be one of the following types of trust:
- interest in possession trusts – where the child may be entitled to all the income
- accumulation trusts – where trustees can retain and accumulate income on behalf of the child
- discretionary trusts – where trustees can make payments at their discretion to the child
With parental trusts for minors, the child’s income from the trust is deemed to be the income of the settlor for Income Tax purposes. This rule only applies to trusts where a relevant child can benefit and the settlor and any spouse or civil partner are excluded.
The Income Tax rate applied depends on what type of trust it is.
Income payments below £100
Where the income arising from all parental gifts made by a parent to a child is less than £100, the child’s trust income is not counted as the settlor’s for Income Tax purposes.
Reporting the tax paid on the settlor’s return
Where the rules apply to treat the income of the child as the income of the settlor, the tax paid by trustees is available to the settlor and not the child.
Each year, the settlor must enter on their personal tax return details of the Income Tax the trustees have paid (to the child) on their behalf. They do this using form SA107 Trusts etc – the trusts supplementary pages of the main SA100 Tax Return form.
The settlor can set the amount paid by the trustee on their behalf against the amount of tax they have to pay and (depending on their overall level of taxable income) may qualify for a refund.
Parental trusts for minors and Capital Gains Tax
Capital Gains Tax is a tax payable on ‘gains’ (profits) made from the sale or transfer of assets such as shares, property or possessions.
For the tax year 2008-09 and beyond, the trustees pay Capital Gains Tax on any chargeable gains they make above an amount called the ‘annual exempt amount’.
Parental trusts for minors and Inheritance Tax
There may be an Inheritance Tax charge when:
- assets (money or property) are put into a trust
- a trust reaches a ten-year anniversary
- assets are distributed from a trust
The Inheritance Tax regime sometimes uses its own classification for trusts. Parental trusts for minors may fall within what are known as ‘relevant property’ trusts, which have to pay Inheritance Tax on anything above the Inheritance Tax threshold of £325,000.