Have Tax Questions? Ask a Tax Expert for Answers ASAP
Thanks.Leave this with me while I draft my answer. There is quite a bit for me to cover so please bear with me.
Hi again.I'd advise you have a solicitor or a tax adviser handle the work required for a trust that I will detail below for you. As your daughter is the minor child of a deceased parent, you should make a vulnerable beneficiary election so that your daughter will benefit from more favourable tax treatment than would otherwise be the case. The election needs to be made no later than 12 months after the 31 January following the end of the tax year in which you wish the election to take effect. Take a look here for some useful information on a vulnerable beneficiary election.Without an election, the trust would pay tax at 45% (20% on the first £1,000) on the net of expenses rental income as disclosed in a trust tax return, though it would be possible to reclaim most if not all of that assuming some or all of the income was paid out to your daughter or used for her benefit and a repayment claim R40 was completed annually. If the income was accumulated within the trust, the tax paid would roll up and be imputed to your daughter as and when income payments were made to her or for her benefit, school fees, clothing, for example. The high tax rate can cause a cash flow problem so its best to avoid it if at all possible.The effect of a vulnerable beneficiary election is to reduce the tax liability by an amount so that it equates to what the tax liability would have been had the income been paid direct to the beneficiary. Take a look here and here for some examples of how the tax is adjusted. The tax rates are out of date. The current trust rate of income tax is 45% (see here). Any income paid out to your daughter or used for her benefit will be excluded from the election. Your daughter, whilst a minor is allowed to have an income of £9,440 tax free in the current tax year as are adults under 65. A trust tax return SA900 will need to be completed at the end of each tax year. I do trust tax returns and I use software to complete them. I would not attempt to complete one manually because of the complexity of the tax calculations.I hope this helps but let me know if you have any further questions.