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What is the tax treatment of trust expenses paid by a settlor or third party?
Trusts remain a popular mechanism to mitigate inheritance tax and provide some income tax efficiency to the benevolence of grandparents who may want to help to pay school and university fees. We often find that in an attempt to maximise the income available for distribution settlors will pay the trust’s tax liabilities and/or professional fees. If these are treated as loans to the trust I believe that there are potential complications with the attribution of any undistributed trust income to the settlor when loan repayments are made.
If the payment of such expenses is not treated as a loan does it represent an additional settlement having in mind that the sums involved will never become relevant property? Sometimes expenses are met by the parent of a minor beneficiary so this could cause problems. Taxation readers’ views would be much appreciated.
Query 18 662–...
