If you hold an investment bond in a trust it is usually the responsibility of the Trustees to report gains to HMRC and to pay the taxes. The exceptions to this are Bare Trusts, where it is the beneficiary’s responsibility and trusts where the Settlor benefits, where it is the Settlor’s responsibility, as long as they are still alive and UK resident. If the Settlor is deceased or non UK resident, it is the trustees who are responsible for reporting and paying tax. All named trustees are liable to be fined if they do not comply with the trustee reporting responsibilities.
You could wait until the trust is liable to taxation and because an investment bond is deemed to be a non-income producing asset, tax is only due when surrenders are made. However, care needs to be taken with trusts which are liable to periodic or exit charges, such as Discretionary Trusts, because tax could be liable even if no surrenders are made from the investment bond.
You can register the trust by 5th October in the tax year after a distribution is made to the beneficiaries and income tax is due. This can be done online, using the Government Gateway website. Reporting can be done by the trustees completing a standard self-assessment form (SA900) after the end of the tax year when tax is due.
Trustees can show the beneficiaries how much tax has been paid by using form R185
Should the trust become liable to IHT it is the responsibility of the trustees to ensure this is reported to HMRC. This can be done by completing form IHT100
Beneficiaries and Settlors who receive distributions or income from a trust also need to report this to HMRC and can use form SA107. Depending on the income tax position of the beneficiaries it may be that income distributed from the trust carries a reclaimable tax credit. If they have unused Personal Allowances this may mean a refund of tax paid by the trust is due. The trustees need to ensure that any tax reclaimed by beneficiaries does not exceed tax paid by the trust. The way tax due or owed is calculated for a discretionary trust is by pooling tax paid by the trust after allowable expenses. Any tax credits claimed by beneficiaries is deducted from this pool. If the pool shows a credit, this can be carried forward to the next tax year. If it shows a debit, it is the responsibility of the trustees to pay this to HMRC.
We can help trustees ensure they comply with their duties and responsibilities regarding suitability and diversification of risk. For more on this, please refer to our section Bonds for Trustee Investments.
Trustees who require assistance with reporting or paying tax can call the HMRC Trust helpline on 0300 123 1072