Case Study 1 Aim 2

Question 1

Explain a DGT is

10 points

Answer 1

-Gift is made into a trust
-If Bare its a PET, if discretionary or flexible its CLT
-Gift is discounted following underwriting and regular payments
-Discount is an immediate reduction to the estate
-Remaining value is outside after 7 years
-Trustees invest money into investment bond
-Settlors set an income that is inflexible for life / exhaustion
-Can make use of 5% withdrawals facility
-Bond grows outside estate for beneficiaries
-Provides a secured income, but no capital access

Question 2

Duties of Trustees

9 points

Answer 2

-Hold trust and administer it for benefit of beneficiaries
-Hold the title documents to any trust property
-Everything done must be to benefit the beneficiaries
-Invest any cash wisely or pay to beneficiaries
-Take account of standard investment criteria
-Use utmost diligence
-Monitor investments
- Avoid conflicts of interest
-Keep proper accounts

Question 3

Factors adviser needs to consider when advising on Aim 2

11 points

Answer 3

Estate worth over 1m so IHT liability
Views on gifting / accessing capital
They are in good health / likely to live 7 years
Significant pension income / other assets so can afford 200k gift
Current CGT liability on UT
They hold ISAs which are tax efficient but UT which are less tax efficient
Base cost of UT
Timescales on when planning on making gift / when money is needed
Can both use their CGT allowances / can use previous losses
Have excess held in cash, not ATR suitable
Amount they wish is below NRB

Question 4

Explain Tax implications of gifting UT into discretionary trust for grandchildren

6 points

Answer 4

Disposal for CGT / holdover relief available
When trustees sell UT gain is taxed on trustees (20%)
Gain is diverted from being taxed on settlor
Gain can be heldover again to beneficiaries (marginal rate)
Beneficiaries need to claim for holdover relief jointly with trustees
Income from UT taxed at 45% on interest or 39.35 on dividend income above trust starting rate of £1,000

Question 5

Bare Trust vs Discretionary Trust

Bare 7 points. Discretionary 12 points

Answer 5

Bare:
Beneficiaries cannot be changed.
Beneficiaries can demand the funds at 18
Full allowances of grandkids can be used for income tax + cgt
PET not a CLT
Trust forms part of estate of beneficiary should they die
Growth outside estate
No periodic charges

Discretionary:
Trustees can change beneficiaries
Can have classes to automatically add new beneficiaries
Trustess have full control over who is paid and when its paid
Holdover relief available on CGT
Trust has £1000 standard band. 45% for income and 39.35 on savings
Trust has CGT exempt amount of half the normal amount split between all settlor’s trusts to a minimum of 1/5
CGT for trustees is 20% or 28% for property
CLT
Immediate charge if over NRB
Back in estate if death occurs within 7 years
10 year periodic charge
Growth immediately outside estate