Full text: Taxation of foundations in Europe

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Only very few interest in possession trusts are taxed at special rates. However, in some ca-
ses special rates may apply, for instance when a company buys back own shares from the 
trustees or where the trust involves vulnerable beneficiaries (these are beneficiaries that 
need special protection). 
10.4. Discretionary Trust 
The trustee has more discretionary power as to the use of income generated by the trust 
assets. Even if he has received instructions on who the beneficiaries should be, he can deci-
de on the amount to be paid, which beneficiaries or groups of beneficiaries are to receive the 
payment, how often, and on the terms of the payments. 
 
It is in his discretion to distribute or retain income realised. If the trust income is not distribu-
ted to the beneficiaries, it becomes part of the trust assets. 
Taxation 
The trustees are subject to taxation at special rates for the income earned. Dividends and 
similar other income are to be taxed at the dividend trust rate (32.5% since 2004-2005), and 
further income is to be taxed at the rate applicable to trusts (40% since 2004-2005). Since 
2005-2006, the first GBP 500 of the trust income are, depending on the nature of the income, 
either subject to a basic rate of currently 22%, a reduced rate of 20%, or the normal dividend 
rate of 10%. (Before 2005-2006, this amount was subject to a special rate.) 
 
The income received by the beneficiaries has already been subject to a 40% deduction 
which is the rate currently valid for trusts. The payments are thus treated as if they were ma-
de after deduction of tax. If, however, the beneficiaries are base-rate taxpayers or are not 
tax-liable at all, they may have the tax refunded. If they are subject to a higher tax rate than 
the 40% applied, no further tax will be due. 
 
If the trustee is authorised to retain income, he can transform the income into capital. If this 
capital is then paid out in later years, it is no longer considered a distribution of income, but 
capital paid out, which is not subject to taxation. 
 
Since 2004/2005, particular regulations apply to beneficiaries deserving special protection; 
these are persons who are mentally or physically disabled or persons who are under the age 
of 18. 
10.5. Accumulation and Maintenance Trust 
The beneficiaries have a claim to the assets (or at least to the income from the assets) only 
after they have reached a certain age (age of 25 at the latest). In the meantime, the trustees
        

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