What tax implications do I need to be aware of with Asset Protection Trusts?

Written by Amy Douch | Wills, Trusts, Tax and Probate Team | 10 July 2024

Asset Protection Trusts (APTs) are often used to manage and safeguard your assets, but it’s important to understand that they come with various tax implications that need careful consideration. Understanding these tax implications ensures that your trust has been set up correctly and operates in compliance with the law.

Inheritance Tax (IHT)

One of the primary concerns with Asset Protection Trusts is their impact on Inheritance Tax. When assets are transferred into a trust, they may be subject to Inheritance Tax if the value of the assets exceeds the nil-rate band, which is the threshold of which no Inheritance Tax is due. Additionally, there could be further Inheritance Tax charges if the value of the trust exceeds the nil-rate band on the 10th anniversary of the trust's creation and every 10 years thereafter. Even if the assets within the Trust are below the taxable threshold of £325,000 (as at 2024), but over 80% (£260,000) the trustees will still be required to complete and submit an Inheritance Tax return for the trust (IHT100), even if there is no tax to be paid. Failure to complete the return within the deadlines from the 10 year anniversary is likely to result in late filing fees and/or penalties.

Capital Gains Tax (CGT)

Transferring assets can trigger Capital Gains Tax on each ‘disposal’. When you place an asset into a trust, this is considered disposal for Capital Gains Tax purposes. This means you may have to pay Capital Gains Tax on the increased value of the asset since you acquired it. Trustees may also be liable for Capital Gains Tax on any gains made when they sell or transfer assets within the trust. There can be reliefs available in certain circumstances, however this still needs to be reported correctly to HMRC and trustees should seek professional advice. There can be strict deadlines of reporting disposals for Capital Gains Tax to HMRC so it is important to take professional advice on this point.

Income Tax

Income generated by assets is subject to Income Tax. Trustees are responsible for paying tax on any income generated by the trust’s assets, although this can become the responsibility of a beneficiary if the trustees have the power to apply income for their benefit. The rates of Income Tax applicable to trusts can be higher than personal Income Tax rates. Beneficiaries who receive income from the trust may also be liable for Income Tax on these payments, depending on their personal tax situation.

Stamp Duty Land Tax (SDLT)

If property is transferred, Stamp Duty Land Tax may be payable. This depends on the value of the property and the circumstances of the transfer. Stamp Duty Land Tax is a significant consideration when placing property into a trust and should be factored into the decision-making process.

Reporting Requirements

These trusts come with specific reporting requirements; trustees must report and pay any tax due on the trust's income and gains to HM Revenue and Customs (HMRC). As well as completing tax returns, the trustees of the trust must register the trust with HMRC’s Trust Registration Service (‘TRS’) and the keep the TRS register updated. They must also keep detailed records of trustee meetings, trustee’s decisions and the trust’s assets. Failure to comply with these reporting requirements can result in penalties and interest charges.

Professional Advice

Due to the tax laws relating to APTs, it is important that you seek professional advice from solicitors specialising in trusts and estate planning, including tax planning. They can help you understand the tax implications, structure the trust correctly, and ensure your trust is compliant with all legal and tax requirements.

Our Wills, Trusts, Tax & Probate team have vast experience in helping clients to review their trusts and implement measures that are both compliant and align with their interests and wishes. If you would like to speak to the team about your personal circumstances, you can get in touch with them by calling 01752 827067 or emailing wills@nash.co.uk.