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If a discretionary trust purchases a house and lets a beneficiary

Customer Question

If a discretionary trust purchases a house and let's a beneficiary live in the house is there any benefit in kind type tax to pay. As in if the trust makes a dispersment to a beneficiary it has to pay 50% tax itself so an equal amount to the amount given to the beneficiary. If the trust was a company and it did the same thing as in buy a house and let a director live there for free I think it would have to pay some tax itself. The trust is in effect giving the same amount it would cost to rent the property to the beneficiary each year.
Submitted: 2 years ago.
Category: Tax
Expert:  bigduckontax replied 2 years ago.
Hello, I'm Keith and happy to help you with your question.

Here is HMRC guidance on how such trusts operate:

'In a discretionary trust, the trustees are the legal owners of any assets - such as money, land or buildings - held in the trust. These assets are known as 'trust property'. The trustees are responsible for running the trust for the benefit of the beneficiaries.

The trustees have 'discretion' about how to use the trust's income. They may also have discretion about how to distribute the trust's capital. The trustees may also be able to 'accumulate' income - add it to capital.'

Their guidance further goes on to say that if income is disbursed to beneficiaries it does so with a notional income tax deducted rather in the same manner as a dividend, but at 45%. This deduction is available against the beneficiaries tax liabilities if any. The concept of 'benefits in kind' does not apply assuming the occupant to be one as authorised in the trust deed.
Customer: replied 2 years ago.

To be clear then at the moment if the trust disburses cash to beneficiaries there is some tax event. As you say the trust pays the tax and the beneficiaries tax allowance can be used to claim that back. If there is a zero percent "loan" either for a house or say a car then there is no tax event for either the trust or the beneficiary ?

 

If the loan is never paid back is there then a tax event as I'm not understanding why trustees don't always "loan" money to beneficiaries rather than give it to them as the tax difference would seem to be big.

Expert:  bigduckontax replied 2 years ago.
It would all depend upon the wording of the Trust Deed. The trustees may do anything within their powers conferred by the deed and to do anything outside the Deed would be an abuse of trust.

If cash is disbursed within the context of the trust then there is a tax event, but rather like a company and its dividends. It is a notional tax. If the Trust Deed gives powers to make loans then were they not repaid that would be a distribution and such distribution must be authorised in the Trust Deed, but the loan itself is not a taxable event per se.
bigduckontax, Accountant
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Expert:  bigduckontax replied 2 years ago.
Thank you for your support.

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