Chapter 8 Flashcards
Who can take out a mwpa policy
On your own life only only from the start of the plan
For spouse or children only
They are bare or absolute trust and are not flexible
Who can create a mwpa
Single
Divorced( this does not change their interest)
Widowed
For the benefit of their children ( not step children )
Cannot be a joint plan
It provides a higher protection than non statutory trusts for bankruptcy
Court can vary following divorce but divorce will not change their interest
Main reason for taking out mwpa policy
To protect against creditors
What else are non statutory trusts called
Express trusts
Where a non qualifying policy is held under trust what are the chargable events
Death of life assurance
Maturity or full surrender
Part surrender a oeuvre 5%
Assignment of plan to trustees is not chargable
How are statutory trusts created
By law
Under married womens property act
Intestacy rules
Who is liable to pay tax on a chargeable event again
If the settlor is alive and UK resident just before the chargeable event or if it’s in the same tax year as death at the highest marginal rate subject top slicing relief
It will be taxed on the trustees if the event happens in the tax year after the date of death or if the settlor is a non-resident
The trustee tax rate is 45% for a discretionary and a&m trust it will have a standard rate band of £1000 within the £1000 there is a 20% tax charge any Excess being taxed at 45%.
This means there will be an additional tax liability of 25% due to the 20% tax credit
If the settlor is alive and UK resident when a chargable event arises who will be assessed income tax on that again
The Setlor
What is the dead settlor rule
Policy is taken out before 17 March 1998 with both the trust and settlor died before that date this income tax liability falls on the settlor however they are dead so there is no tax liability on the gain as long as the policy has not been varied or enhanced since 17 March 1998
Can a nontaxpayer reclaim the 20% tax credit provided by UK policy
No
Who has to be assessed for income tax on any gains that rise on policies under a bear trust or absolute trust
The beneficiary unless this is the parent of an unmarried minor beneficiary and the chargeable event again for the tax year exceeds £100 the whole of the gain be taxable on the parent.
This is for each parent so therefore maximum limit of £200 will apply when parents the sole beneficiary of set up a joint bear trust.
Be aware the hundred pound limit relates to all income in one tax year
Do you pay capital gains tax on a life policy in trust
I life policy is only subject to capital gains tax if it is assigned for actual consideration this rarely happens with the trust policy
What are the implications of placing an existing life policy into trust
Regular premiums -it is the total value of the premiums
Regular premiums could be covered under the normal expenditure from income exemption as long as it does not affect the standard of living for The settlor
The annual £3000 exemption can also be used
For a single premium policy the single premium will be the transfer value for I HT
Premiums for policies held in absolute trust will be treated as pets
For most of the trust created after 22 March 2006 and all discretionary trust the excess over the available exemption is a chargeable lifetime transfer and taxed at 20% if over the 325,000 less transfer is made within the previous seven years
There may also be a 10 year anniversary periodic and ex-it charge
For interest in possession trust before 22 March 2006 all premiums were treated as pets but any changes since 6 October 2008 will bring them into line with new rules
What is pre-owned asset tax poat
Anti-avoidance measure targeted at more complicated IH T arrangements such as gifting of family home and continuing to live there
This does not include loan trusts and discounted gift trust that could include business trusts
It is a freestanding annual income tax charge on gifts made since 18 March 1986.
The yearly income benefit that the donor is deemed to receive from the gift that income tax charge is levied on the donor and not the current owner at the marginal rate
What are the three categories of PoAT
Land including buildings
chattels
intangible assets held in a secular interest trust such as life policies
Land and chattels will be revalued every five years
This official rate of interest for POAT is 3% on the asset market value
I charge to income tax will only occur if the value of the benefit is more than £5000 a year i.e. the minimum value is 166,666 or less
£166,66 x3%=£5000
The donor is subject to income tax charge on the whole amount and not just the XS
If a POAT charge could apply to an arrangement for 2015/2016 the GWR election must be made by when
31 January 2017
When could it be worth making an election for a gift to be treated as a GWR
The asset may qualify for hundred percent agricultural business relief
The spouse exam she would apply
The value of the asset plus the rest of the estate would fall in to the new rate and under
The asset owner is younger and healthier
What reasons would you elect to pay the annual POAT charge
The donor can afford to pay the annual charge
The donor has a short life expectancy for age
The amount of the POAT charges below 5000 the donor does not want to pass the IHT burden to the Donee
What rate of interest applies to the POAT
3%
How do business trusts work
Can be limited company or partnership
Each shareholder takes out and own life policy in trust for the value of the shares
The cash sum is in trust and is used by the deceased critically ill shareholding
Normally a discretionary trust
The beneficiaries will be the other shareholders the settlor is also a beneficiary so it can revert back if they leave the firm
How does a cross option agreement work for business trusts
Where are surviving shareholder partner have the option to buy the decision as the deceased personal representatives have the option to sell
It will qualify for business relief if owned for a least two years
The premiums paid for the life policy will be classed as a CLT unless within 3000 annual exemption or out of normal expenditure
The policy proceeds will not be in the beneficiaries of state and it would not class is a GWR as it is purely a commercial basis
Is interest in possession trusts trustee residence status relevant for income and cgt?
Relevant for discretionary trusts not for IIP trusts
Why are pensions established under a trust
To keep them separate from the employer
Most run under a trust deed setting out, who, when, how much etc
Normally 3 trustees some for employers and some for employees
Outline the IHT on OPS death benefits
Most are written under a disc trust
The trustees control who gets the death benefits not the member
It needs to be paid out within 2 years or will be unauthorised payments
Expression of wish is just that
Neat is paid out at the members discretion
What act now allows more pension flexibility
Taxation of pensions act 2014
If a member dies under age 75 and if income lump sum get paid away within 2 years then it’s free of tax otherwise it will be 45% tax
If over 75, lump sum is taxed at 45% and income at nominal rate of beneficiary
IHT issue can arise if member was ill health the contribution could be classed as a CLT
What is a non uk resident trust for Income tax and CGT reasons
If all the trustees are non residents
It will be uk taxed if 1 trustee is non res and Setlor was non res when the trust was made or when funds were added
What date did tax relief on Personal pension life cover stop
6 dec 2006.
If the plan is put into a trust the premiums will be a transfer of value for IHT but normally falls in the annual exemption and will be paid out free of IHT
If there’s no trust in place in a RAC pension what happens to the benefits in death?
They were never written into discretionary trust so all death benefits paid into members estate and taxed for IHT unless a personal trust is used. A by pass trust cannot be used
Why are letter of wish under pension not legally binding
So that they can be paid away without IHT under discretionary trust rather than absolute trust
What is a relevant life policy
Employer funded life policy in the life of the employee
Conditions are
Member must be under 75
No surrender value
Benefits payable to individual or charity via trust or directly
It Can also cover terminal illness cover whilst employed
Advantages of holding life assurance and pensions under a trust;
Paid to intended beneficiaries
Paid outside the deceased estate
Don’t have to wait for probate
Can allow for different beneficiaries to benefit
Plan holder can be trustee and have some control
What is a statutory trust
One created by law
MWPA 1882, mainly under bare or absolute - not flexible.
Don’t need to be married
Can’t be joint plans
Must be on your life not life of another
Provides a higher degree of protection in the event of bankruptcy
Also under intestacy
Who can benefit from MWPT?
Spouse only
Children only
Spouse and children
Under MWPA is a deed of assignment needed?
No as the trustees are legally appointed under MWPA
What is an express trust
A non statutory trust
Procedure for new Non statutory trust
Complete a declaration of trust appointment them as sole trustee
Then issue power to appoint other trustees under the trust
Once policy issued other trustees are appointed by a simple deed
A declaration of trust for new or existing plan is exempt from stamp duty
Will an assignment of existing life plan into trust be a transfer of value for IHT purposes?
Yes
