A new client has come to me (as a tax adviser) with an existing Constructive Trust. Trust tax returns have been completed and it has been treated as a discretionary trust (which accords with the trust deed I have seen). Trust property is cash and shares. In fact the shares are amalgamated with two of the discretionary beneficiaries (who are also trustees) own shares and apportionment made. The cash is in separate building society accounts but basically these two beneficiaries treat all of the income as their own and pay the trust tax/reclaim some on their personal self assessments.
My initial question was regarding how much I should treat as distributed to the beneficiaries. It looks as though the previous agent based it on the tax pool, ie grossed it up so that no additional tax was payable by the trust. I was not sure that this was correct, but if I treat all the net income (after tax and fees) as the distribution it gives a much higher net tax bill. Accounts have not been prepared thus far. My concern is that future beneficiaries (children and grandchildren of settlors) could claim that there should be some undistributed income somewhere.
When I tried to ask this question of a technical helpline the advice I was given is that Constructive Trusts are bare trusts and so no trust tax returns are necessary and the trust tax rate doesn’t apply! Presumably this would mean that the trust property is not outside the estates of the trustees/beneficiaries currently receiving the income?
Any advice would be gratefully appreciated. I am a STEP student and so I want to learn as much about this as possible, as well as provide the correct answer for my client.
If there is a trust deed, setting out the terms of the trust, I am not sure how it can be a “constructive trust” without something more.
It may be that as the trustees have mixed the trust assets with their own assets, a constructive trust has arisen in that respect, and the trustees hold the trust assets on constructive trusts for the benefit of the trust. In which case they hold personally on bare trusts for the trustees of the formal trust (in that capacity).
Unless the 2 beneficiary trustees have appointed themselves as life tenants, it would appear they may not fully appreciate the terms of the trust, or their duties and responsibilities trustees. It is right to feel concern that other beneficiaries may raise questions, but they could be more wide ranging than merely the possibility of there being undistributed income.
The outline provided raise a number of “red flags” and It seems to me appropriate for an experienced trust practitioner to sit down with the trustees, to go through and understand what they have done, and then consider if anything needs to be done and, if so, what. In talking through what has been done to date, the practitioner will be able to understand the depth of knowledge and awareness of the trustees of their duties, etc.
What is the basis of the constructive trust?
Are the current trustees/beneficiaries entitled to all the income as a result of the court decision or are they taking advantage of their trustee position to the detriment of other beneficiaries?
If it really is subject to RAT tax and there has been dividend income, which has all been extracted then there is likely to have been a tax pool charge or the previous trust tax returns may have been inaccurate.
Alternatively if as you suspect no RAT tax was due then equally the previous returns may have been wrong.
You need to establish the correct position going forward but I’m not sure you have provided enough information in the question for others to to comment.