1 - Income Tax (L) Flashcards
L Income tax and trusts
In a bare trust, who owns the asset and owns any income?
Beneficiary
Who is liable for the tax on income from a bare trust?
Beneficiary, because it’s their income
What is a settlor-interested trust?
Where trust income is usually taxed as the parent’s income if they are an unmarried minor
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?
False
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?
Discretionary
Who gets the income in an interest in possession trust?
These are trusts where the trustee must pass on all trust income to the beneficiary as it arises (less any expenses).
What tax allowance do bare trusts have with an irrevocable designated or nominated account?
CGT allowance
What are the 2 categories of vulnerable beneficiary as stated under the Finance Act of 2005?
Disabled persons and ‘relevant’ minor children.
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)
- 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).
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?
Mental Health Act 1983.
With regards ot trust planning, who is a ‘relevant minor child’?
A relevant minor is a child who has not yet attained the age of 18 and at least one of whose parents has died.
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?
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
What are the four key drivers for potential vulnerability?
Health, life events, capability and resilience
Trustees are allowed a deduction from the income tax that they would pay on a trust for vulnerable beneficiaries, how is this calculated?
- Work out normal tax, if say trustee was taxed
- Work out beneficiary tax
- Difference between the two is then claimed as relief
What is meant by ‘qualifying trusts income’ in regards to life interest and interest in possession trusts: ?
Income from assets held in trust for a vulnerable beneficiary
Are trustees entitled to a personal savings allowance for savings income and dividend allowance?
No
Tax on savings income in a life interest or interest in possession trust, when paid by trustees, is taxed at how much?
20%, higher and additional rates never apply
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?
Direct the income straight to the beneficiary
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?
R185
Trust expenses are set against income before being paid to the beneficiary in what order?
- UK dividends;
- foreign dividends;
- savings income; and
- other income.
Are interest in possession trustees liable to higher rates and additional rates of tax on income received?
No, just 20%. Always 20%.
Life interest and interest in possession trusts: Who is the life tenant in the trust?
Beneficiary
Can trustees deduct expenses in calculating their tax liability?
No
In a discretionary or accumulation and maintenance trust, who has discretion over the distribution of income and capital?
Trustees
Discretionary trusts and accumulation and maintenance
trusts: If a settlor has created more than one trust, what happens to the trustees standard rate band?
Divided equally between the trusts
Discretionary trusts and accumulation and maintenance
trusts: is the standard rate band a tax-free allowance? Explain.
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.
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?
39.35% for dividends and
45% for other forms of income – the same rates that apply to an additional-rate-taxpaying
individual.
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?
A special
exemption will apply to trusts with income of under £500 per year, where no income tax
will be due.
A Family Trust accumulates all its income and has no expenses, it’s gross interest is £1,000, what is the income tax due?
£1,000 x 20% = £200 (falls within £1,000 standard rate band)
How much income is taxed at standard rate for trustees of a discretionary trust, assuming the settlor has only set up one trust?
£1,000
When trustees of a discretionary trust make an income distribution to a beneficiary, what type of income does this become?
Trust income
