Trustee tax responsibilities :Cross Stitch – Money, tax and benefits

Trustees who are responsible for managing a trust have joint responsibility for ensuring that tax is properly declared and paid. If you’re a trustee you can get professional help, but the overall responsibility is still yours. The key duties of a trustee in relation to tax are outlined below.

The extent of a trustee’s responsibilities depends on the type of trust it is. For example, a ‘discretionary trust’ trustee is responsible for deciding when to make payments to beneficiaries. Trustees are also responsible for declaring and accounting for tax on trust investments.

In a ‘bare trust’, the trustee may have few duties to perform. Providing they are old enough, the beneficiaries decide how to use trust capital and income and are responsible for declaring and paying any tax due.

The person who set up the trust – the settlor – may have given instructions that trustees carry out various functions. These may be contained within the ‘trust deed’, which outlines the terms of the trust. Trustees are legally bound to act on these instructions.

Where there is more than one trustee you normally arrange for one person – known as the ‘principal acting trustee’ – to deal with HM Revenue & Customs (HMRC).

The actions of the principal acting trustee are treated as actions of all of the trustees, so:

• if they deal with everything properly, all of the trustees are treated as fulfilling their tax obligations
• if they fail to fulfil the trustees’ obligations, all of the trustees are treated as failing to meet their obligations

All the trustees of a trust are jointly liable for any tax due, not just a share of it. As a result HMRC can recover any tax or interest on tax from any trustee, if the principal acting trustee doesn’t pay or pays late. Also, any trustee can be held liable for penalties or surcharges incurred during the period he or she was a trustee.

Trustees are responsible for making sure that any income or gains are declared and tax is paid.

Notifying HMRC that tax is due

If you’re a trustee and haven’t already received a Trust and Estate Tax Return you must notify HMRC when:

• a new trust that will receive income or make chargeable capital gains has been set up
• a trust that hasn’t been receiving income or making chargeable capital gains starts to do so

Trustees need to keep a record of the trust’s income and expenses. You need these records to complete the Trust and Estate Tax Return.

If you receive a tax return or a notice to file a return from HMRC, you have to either fill in a return and send it back, or submit a return online. This applies even if your trust hasn’t received any income or made any gains that year. It’s important to think about whether HMRC really needs to be told about your trust. To avoid having to complete a tax return unnecessarily it’s better to wait until your trust is receiving income or has made any chargeable capital gains.

The Trust and Estate Tax Return is also one of the main ways to notify HMRC about changes and events that affect the status of the trust. For example, new assets transferred into a trust, changes of address of the trustees, or the trust ending.

It’s the trustees’ responsibility to provide the beneficiaries of discretionary payments with a statement when asked, showing how much income they received in a tax year. The statement should also show the tax paid on that income. You can download form R185 (Trust Income) to do this. This form can also be used by trustees to inform interest in possession trust beneficiaries of their entitlement.

If the trust is settlor interested the trustees can use form R185 (Settlor) to notify the settlor of the amount of income to be taxed to the settlor and the amount of tax already paid on behalf of the settlor.

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