1 - Income Tax (L)

Question 1

In a bare trust, who owns the asset and owns any income?

Answer 1

Beneficiary

Question 2

Who is liable for the tax on income from a bare trust?

Answer 2

Beneficiary, because it’s their income

Question 3

What is a settlor-interested trust?

Answer 3

Where trust income is usually taxed as the parent’s income if they are an unmarried minor

Question 4

Income of a bare trust for a minor is taxed as the parent’s income when the capital comes from a grandparent or other relative or individual. True or false?

Answer 4

False

Question 5

According to changes introduced by the Finance Act 2006, if a trust is not a bare trust, what is it likely to be in most circumstances?

Answer 5

Discretionary

Question 6

Who gets the income in an interest in possession trust?

Answer 6

These are trusts where the trustee must pass on all trust income to the beneficiary as it arises (less any expenses).

Question 7

What tax allowance do bare trusts have with an irrevocable designated or nominated account?

Answer 7

CGT allowance

Question 8

What are the 2 categories of vulnerable beneficiary as stated under the Finance Act of 2005?

Answer 8

Disabled persons and ‘relevant’ minor children.

Question 9

To qualify as a ‘disabled person’ in a vulnerable beneficiaries trust, the disabled person must qualify for at least one of which state benefits? (5)

Answer 9

• Attendance Allowance;
• Disability Living Allowance (DLA) (either the care component at the middle or highest rate, or the mobility component at the highest rate);
• Personal Independence Payment (PIP);
• Constant Attendance Allowance; or
• Armed Forces Independence Payment (AFIP).

Question 10

The Government has so far not amended the definition of mental illness for disabled persons, so which act should be referred to when ensuring someone qualifies?

Answer 10

Mental Health Act 1983.

Question 11

With regards ot trust planning, who is a ‘relevant minor child’?

Answer 11

A relevant minor is a child who has not yet attained the age of 18 and at least one of whose parents has died.

Question 12

How much can a trustee place in a trust each tax year for a relevant minor child, that’s either a bare, discretionary or interest in possession trust?

Answer 12

The lower of £3,000 or 3% of the trust fund - without having to prove that it is for the benefit of the vulnerable beneficiary

Question 13

What are the four key drivers for potential vulnerability?

Answer 13

Health, life events, capability and resilience

Question 14

Trustees are allowed a deduction from the income tax that they would pay on a trust for vulnerable beneficiaries, how is this calculated?

Answer 14

1. Work out normal tax, if say trustee was taxed
2. Work out beneficiary tax
3. Difference between the two is then claimed as relief

Question 15

What is meant by ‘qualifying trusts income’ in regards to life interest and interest in possession trusts: ?

Answer 15

Income from assets held in trust for a vulnerable beneficiary

Question 16

Are trustees entitled to a personal savings allowance for savings income and dividend allowance?

Answer 16

No

Question 17

Tax on savings income in a life interest or interest in possession trust, when paid by trustees, is taxed at how much?

Answer 17

20%, higher and additional rates never apply

Question 18

Life interest and interest in possession trusts: To avoid the trustee paying tax on income they receive in an interest in possession trust, what can be done?

Answer 18

Direct the income straight to the beneficiary

Question 19

What form should a trustee fill in to declare to a beneficiary details of the net income and tax deducted, so that they may be able to do their own tax return?

Answer 19

R185

Question 20

Trust expenses are set against income before being paid to the beneficiary in what order?

Answer 20

1. UK dividends;
2. foreign dividends;
3. savings income; and
4. other income.

Question 21

Are interest in possession trustees liable to higher rates and additional rates of tax on income received?

Answer 21

No, just 20%. Always 20%.

Question 22

Life interest and interest in possession trusts: Who is the life tenant in the trust?

Answer 22

Beneficiary

Question 23

Can trustees deduct expenses in calculating their tax liability?

Answer 23

No

Question 24

In a discretionary or accumulation and maintenance trust, who has discretion over the distribution of income and capital?

Answer 24

Trustees

Question 25

Discretionary trusts and accumulation and maintenance
trusts: If a settlor has created more than one trust, what happens to the trustees standard rate band?

Answer 25

Divided equally between the trusts

Question 26

Discretionary trusts and accumulation and maintenance
trusts: is the standard rate band a tax-free allowance? Explain.

Answer 26

No - any income that falls within the
standard rate band will still be liable to tax, but tax will be charged at the basic rate of
20% for non-dividend income and 8.75% for dividends, rather than the usual higher rates
applicable to trustees.

Question 27

Discretionary trusts and accumulation and maintenance
trusts: what is the income tax position for trustees when income does not fall within the standard rate band?

Answer 27

39.35% for dividends and
45% for other forms of income – the same rates that apply to an additional-rate-taxpaying
individual.

Question 28

Discretionary trusts and accumulation and maintenance
trusts: According to the Spring Budget of 2023, if the standard rate band is removed with effect 6 April 2024, what would be put in place instead?

Answer 28

A special
exemption will apply to trusts with income of under £500 per year, where no income tax
will be due.

Question 29

A Family Trust accumulates all its income and has no expenses, it’s gross interest is £1,000, what is the income tax due?

Answer 29

£1,000 x 20% = £200 (falls within £1,000 standard rate band)

Question 30

How much income is taxed at standard rate for trustees of a discretionary trust, assuming the settlor has only set up one trust?

Answer 30

£1,000

Question 31

When trustees of a discretionary trust make an income distribution to a beneficiary, what type of income does this become?

Answer 31

Trust income