11 - Taxation On Trusts Flashcards
What is a trust agreement
Trustee owns property as a nominal owner for the good of a beneficiary
Settlor
Person who creates the trust, can also be beneficiary but very rare
4 main types of trusts:
Bare trust
Interest in possession trust
Discretionary trust
Disabled trust
Bare trust - Has immediate right to assets income & capital and beneficiary cannot be changed
Interest in possession trust - immediate right to assets income but not capital
Discretionary trust - trustee has full discretion on how to use the trust as have number of beneficiaries
Disabled trust - trust for a vulnerable person
Income tax rules for bare trust and disabled trust
Beneficiary is liable for income tax (unless settlor is parent of minor and is over £100 as would then be taxable as the parent)
Income tax rule for interest in possession trust
Trustees responsible for declaring and paying income tax
Trust expenses taken before beneficiaries paid and offset in this order:
1. UK dividends
2. Foreign dividends
3. Savings income
4. All other income
Rate:
20% for all income other than dividends
8.75% for dividend income
Once trust paid to beneficiary income tax can then be reclaimed and not able to use any savings or dividend allowances:
- non tax payer reclaim 25%
- BRT no further liability
- HRT & ART must pay tax dependent on source of income (savings, dividends)
- ART reclaim 0%
R185 form
For interest in possession trust to detail classes of expenses offset against trust amount
Income tax rules for Discretionary trust
Trustees responsible for declaring and paying income tax
Income upto £1k rates:
20% all income other than dividends
8.75% dividend income
Income over £1k:
45% all come other than dividends
39.35% dividend income
Trust expenses taken before beneficiaries paid and offset in this order:
1. UK dividends
2. Foreign dividends
3. Savings income
4. All other income
Once paid income tax can then be reclaimed as given 45% tax credit and not able to use any savings or dividend allowances:
- Non tax payers reclaim 45%
- BRT reclaim 25%
- HRT reclaim 5%
- ART no further liability
What is variation to tax rule for interest bearing trust?
If trust is mandated to be paid directly to beneficiary then beneficiary must devalued income on self assessment and not responsibility of trustee. Tax paid as if was own income.
CGT for bare trusts and disabled trust - rate and exemption amount
CGT as if trust is held in own name. So 10% or 20% (unless surcharge on 2nd resi. then 18% & 28%)
Usual exemption amount of £12,300
CGT on interest in possession trust and discretionary trust - rate and exemption amount
CGT rate of 20% (28% resi.)
Exemption amount of £3,000.
Hold over relief
No CGT payable at time of gift and receiver acquires at the cost to the donor for when they dispose of it for CGT
What trust type is holdover relief not available to when acquiring a property?
Bare trust
Holdover relief treatment for CGT on trust pre and post 22 March 2006
Pre:
- free uplift in acquisition values
Post:
- No uplift in acquisition values
