Is a Trust Able to Invest in CFDs?


Q.: Is a Trust able to invest in CFDs?

A: For some reason there is confusion about whether trusts can invest in CFDs. A popular misconception amongst investors and speculators is that trust accounts are considered in a different way by their CFD broker to individual and company accounts. While there are many rules governing the conduct of trusts, there is nothing that stops them investing in legitimate financial vehicles, such as contracts for difference.

In reality, as far as the CFD broker is concerned, it is just another trading account; the only difference being the tax treatment of gains when the trustee is about to distribute them to the beneficiaries of the trust. So where there are some differences compared to a personal trading account is where the profit or loss is concerned, and how this is dealt with for tax purposes. After all, trusts are usually set up to provide some financial advantage over personal funds, and this includes the treatment of tax.

 

There are other reasons that a trust may be established, and these could include separating the funds from any personal ownership in case of bankruptcy or insolvency of one of the members of the trust. Trusts can also be used to pass down family wealth to future generations, and with the right structure, can avoid many of the complications and lengthy technicalities involved in proving a will before the funds of a deceased family member can be accessed.

But taxation is a big one, and correct operation of a trust will help with tax avoidance, which is legal, as opposed to tax evasion, which is not. This can be done, for example by taking advantage of favorable taxation treatment through the use of income tax 'tax-free thresholds' of particular members of the family.

Trust: The Settler and the Trustee

A trust is set up by a “settler” who provides the funds and sets the trust’s terms and conditions in a 'trust deed', and by a “trustee”, who takes on the responsibility of administering the trust in accordance with those terms and conditions. So in other words the trustee is accountable for the trust and its assets while the settler simply executed the trust deed and will usually cease to have any further involvement in the trust.

The trust is then operated by the trustee to the benefit of the trust’s named “beneficiaries”. The trustee has broad powers to execute the trust, and control its assets. Often the trust is a family trust, formed for the generational advantages mentioned above and the trustees may be the parents while their children and other dependents are often listed as beneficiaries.

An important benefit of a family trust is that the trustee is empowered to pay out the profits from the trust to the beneficiaries in a way that can maximize their tax advantages. Depending on the tax allowances and existing taxable income of each beneficiary, they can receive the optimum amount of revenue from the trust. This is because Trustees don’t have to pay trust distributions in any particular ratio or in the exact same proportion. Distributions from a trust are considered part of the beneficiary’s normal income, and are added to any other income to determine the total taxable amount.

Any earnings distributed in this way from the trust are taxed on the basis of the recipients, and the trust itself pays no taxes on them. If any earnings are not distributed, then the trustee is required to pay tax on them on the trust’s behalf. Trustees can distribute trust income to many beneficiaries, and in proportions that benefit from those beneficiaries’ personal tax rates. Given that the trustee is at liberty to determine the most tax efficient distribution, it would be expected that most if not all of the trust’s earnings would be distributed to beneficiaries each year, especially as undistributed trust funds’ income is assessed at a high tax rate. The beneficiaries then have to pay the tax on distributions made to them; with distributions usually forming part of a beneficiary’s assessable income. This means that should the beneficiary receive other income from external sources along with distributions from the trust, all of the individual's income is taxed together.

For example, let's take the case of a family member of a trust who only receives income from the trust. This member benefits from the tax-free income threshold (currently about 10K in the UK) for that year, and the trustee could distribute a part of the family's trust's revenue to this family member. As a result the beneficiary would gain some returns but may not have to pay tax if the amount he receives is lower than 10k. Should the allocation to the beneficary exceed his tax-free threshold, the excess amount will be taxed at the beneficiary’s applicable personal tax rate.

Income Distribution

In addition, the trustee also has to exercise care when deciding which beneficiaries are chosen to receive distributions, as penalty tax rates may be applicable to distributions made to minors. Distributions naturally have to be made only to individuals who qualify under the terms of the trust deed to be beneficiaries of the trust. For trusts that have made a family trust election, the distributions are only possible to beneficiaries who are within ‘the family group’.

This article represents the current legal situation for trusts in general terms, and should not be relied upon when forming your own trust. You should always take expert advice to ensure the legality of any action, and that it works with your present circumstances to accomplish your requirements.


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