How trusts are subject to tax

Question 1

Describe the tax treatment of the income (dividends from a portfolio of equity funds) received by the trustees of the interest in possession trust in 23/24 tax year (4)

Answer 1

• The trustees
• are liable to income tax
• at 8.75%
• with no personal/dividend allowance

Question 2

Explain how the beneficiary (higher rate tax payer) must report and pay tax on the income distributed by the trustees of an interest in possession trust (23/24) tax year (7)

Answer 2

• The income is payable to the beneficiary with a credit for tax paid the trustees
• The trustees will send form R185 to the beneficary with the details of the net income and tax deeducted
• The beneficiary must then report the income on their tax return
• As they are a higher rate tax payer
• they will pay further tax
• on any income in excess
• of any available dividend allowance
• ## by 31st Jan following the end of the tax year 31/01/25

Question 3

Describe how an 18-25 trust is created (5)

Answer 3

• Can be created for minors
• after 22nd March 2006
• On the death of a parent
• By their Will or intestacy
• or under the Criminal Injuries Compensation Scheme

Question 4

Explain the IHT position for the beneficiary of an 18-25 trust (3)

Answer 4

• The beneficiary is only treated as owning the trust assets for IHT purposes until age 18
• An exit charge is levied when the absolute entitlement is given
• Based on the period since the beneficiary’s 18th birthday

Question 5

Explain how a trustee could distribute the trust fund to the two grandchildren and any potential tax implications (4x discretionary trusts with OEICs as the only trust asset) (12)

Answer 5

• The trustee could encash the OEICs
• The trustee would be liable to CGT on any gain in excess of the CGT annual exempt amount of £3k
• This will be divided by 4 = £750 each
• CGT is charged at 20%
• Or the trustee could transfer the OEICs to the grandchildren and claim holdover relief
• Trustee would not be liable to CGT on the transfer
• The grandchildren acquire the OEICs at the original acquisition cost to the trustee
• Grandchildren would be liable to CGT when they dispose of he assets
• An IHT exit charge may/may not be payable

Question 6

How is a periodic charge calculated (8)

Answer 6

Trust value at 10y - £325k = ✖️
✖️ x 30% = ©️
©️ x 20% = ®️
®️ / trust value at 10y x 100 = effective rate

Question 7

How is an exit charge calculated (4)

Answer 7

Current trust value x (number of quarters since 10y / 40) = ✖️
✖️ x effective rate (worked out in periodic calc) = exit charge

Question 8

Calculate the IHT liability on the transfer of £500k into a discretionary trust if paid by the individual (5)

Answer 8

£500k - £6k (annual allowances) = £494k
£494k - £325k = £169k
£169k x 25% = £42,250

Question 9

Calculate the IHT liability on the transfer of £500k into a discretionary trust if the trustees pay the tax (5)

Answer 9

£500k - £6k (annual allowances) = £494k
£494k - £325k = £169k
£169k x 20% = £33,800

Question 10

Explain when the trustee of a discretionary trust should make payments on account under self assessment for the 21/22 tax year stating the relevant amounts (7)

20/21 - income tax liability £6k
21/22 - income tax liability £8k

Answer 10

• First payment on account must be paid by Jan 31st 2022
• This is 50% of the previous year’s liability = £3,000
• Second payment on account must be paid by 31st July 2022
• This is 50% of previous year’s liability = £3,000
• Balancing payment must be paid by 31st Jan 2023
• This is the actual liability for 21/22 less the two payments on account = £2,000
  Plus the first payment on account for 22/23