Client has a house held in a promissory trust. No longer lives in the property but earns a rental income from it. The trust half of the income is taxed at the "other trust" rate of 45% and this is a problem as the marginal rate of tax for client is 20% and probably always will be. The interests of the beneficiaries (client's children) must be upheld but can the trust be wound up easily?
The trust was set up when they were all the rage but inheritance tax isn't going to be an issue because of the thresholds increasing and property values in my area not doing so. Whilst the trust would protect against any IHT it seems crackers to be taxed at 45% on the income it generates.
Anyone come up against this problem? I'm happy with calculating the tax but not happy that my client is effectively overpaying (client respnsible for trust tax) and has no visible benefit from the trust now it is rented out.
Replies (3)
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Reclaim tax?
A distribution of the net income to your client as beneficiary would enable him/her to reclaim the tax paid in excess of his/her personal tax liability. Or the income could be distributed to the other beneficiaries (or used for their education/maintenance etc if they are minors) and all or part of the tax reclaimed if they are not liable at 45%.
Winding up the trust might be an option but, as you say, acting in the interests of the beneficiaries is vital and having minor beneficiaries would, I suspect, make it impossible to appoint the trust's half share of the property to your client.
Cathy