Tax Advisors And Tax Avoidance Not Tax Evasion - How Trusts Work

Well I guess the answer to that question is that just about everybody would.

There have been a number of schemes that people have been using in the hope of paying less tax, but each one has fallen by the wayside as HMRC have been gradually tightening their grip and closing these tax reduction schemes.

One device that has not been caught in HMRC's net is the Remuneration Trust. The reason for that is because these devices tend to be very complex in nature and use centuries old trust laws .

To begin with an organization determines to create its Remuneration Trust employing specialist taxation barristers as well as other thoroughly regulated legal and trustee experts and after that establishes the amount of profit it would like to relieve.

This is actually a commercial judgement and will be based on guidance from the firm's professional advisers.

As soon as the amount is decided it is contributed to the Remuneration Trust including a transaction fee which is then subtracted from the fund by the trustees; this is paid to the Remuneration Trust provider leaving between 90% and 97% of the contribution inside the Remuneration Trust based on the accrued trust value to date.

The contribution is treated as being an ‘Administration expense’ being entered as “Contribution to the XYZ Company’s Cash Remuneration Trust” within the firm's profit and loss account. Additionally it is disclosed in the firm's notes to accounts – the financial transaction is therefore fully transparent.

Therefore the deduction clearly lessens the amount of the company’s taxable profit.

Once in the Remuneration Trust the funds are then free of any tax charges and may interact tax free with the outside world in any manner at the discretion of the trustees or their delegated fiduciary representative who may be a director of the company. A small annual trustee management fee will apply.

The funds which are contributed to the Remuneration Trust are therefore available for investment and loan at the discretion of the Trustees or their delegated fiduciary representative(s).

Because a Remuneration Trust is specifically prohibited from providing benefits “by reason of employment” it falls outside Part 7A of ITEPA and so loans from a Remuneration Trust cannot be chargeable to Income Tax. Queens Council's opinion confirms this.

The terms of such loans are such that there is no repayment of capital or accrued interest until the borrower dies, thus leaving a debt to offset against estate taxation, so protecting the deceased’s estate for the tax free enjoyment of those named in the Trust Deed.

This is a brief description of how a Remuneration Trusts and an Umbrella Remuneration Trust work.