Investment and administration of Trusts Flashcards

1
Q

Conversion and apportionment

A

Trustees must consider interests of all beneficiaries

o Must not favour one class over another (e.g.life tenant in favour of remainderman or vice versa)

  • Pre Trusts (Capital and Income) Act 2013, trustees had to sell wasting assets to avoid unfairness
    o Known as duty to convert - subject to certain rules

 Does not apply to property settled by deed, land or intestacy
 Had to convert to cash within 1 year
 Unless trust deed said otherwise

o Trusts created on or after 1 October 2013 no longer need to do this unless the trust deed says the duty to convert remains

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2
Q

Variation of Trusts Act 1958

A

Once trust is created it is usually irrevocable and invariable

  • The Variation of Trusts Act 1958 allows court to vary a trust for any:

o Beneficiary incapable due to infancy
o Contingent beneficiary
o Unborn person
o Person with a discretionary interest under a protective trust. ie interest arises on the bankruptcy or alienation of the principal beneficiary

 The court must feel that the variation must be for the benefit of the beneficiary (e.g. social, moral, educational or financial) but cannot take away an interest of an adult beneficiary (except with their agreement) and although it can be used for tax purposes, court may not agree to it

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3
Q

Trustee Act 1925 - Variation of trusts

A

Court can permit trustees to do something outside their remit if it is ‘convenient for the trust as a whole’ thus allowing for unforeseen circumstances (beneficiaries in financial difficulty), but cannot vary beneficial interest

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4
Q

Settled Land Act 1925 - Variation of trusts

A

Permits the same for land and beneficial interests can be changed - ‘convenient for the trust as a whole’

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5
Q

Matrimonial Causes Act 1973 - Variation of trusts

A

Can vary marriage settlements previously made for benefit of ex-spouses / children

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6
Q

What is the purpose for Charitable Trusts?

A

Must be wholly and exclusively of charitable nature for public benefit

Includes – among many others – poverty, education, religion, health, art, sport

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7
Q

How do charitable trusts differ?

A

Charities Act 2011 - Governs charitable trusts

o Cannot be void for uncertainty
o Can continue indefinitely and can be varied if become obsolete
o Only accumulate for 21 years (Perpetuities and Accumulations Act 2009) unless court / Charity Commission say otherwise
o Cannot fail–instead trust property can be given to a similar charity – called cy-pres doctrine.

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8
Q

How do charitable trusts differ - Tax ?

A

o Trust–exempt from income tax and CGT
Donors

  • Gifts exempt from CGT and IHT, IHT reduces to 36% on estate of an individual where 10% or more of their net estate (estate after reliefs and exemptions) is left to charity.
  • Income tax relief where gift aid / payroll giving used.
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9
Q

How does Scottish Law Differ?

A

Scottish legislation
 Trusts (Scotland) Act 1921
 Trusts (Scotland) Act 1961
 Charities and Trustee Investment (Scotland) Act 2005

For a valid trust in Scotland, there must be delivery of trust property to trustees or beneficiaries or an overt act that signifies irrevocability

A Scottish trust can continue in perpetuity, but there are limits on accumulation of income.

Limit is longest of:
 Granter’s (settlor’s) life
 21 years from granter’s death / trust’s creation
 Minority of anyone living at granter’s death / trust’s creation

Only 1 signature needed on Scottish trust deed.

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10
Q

What is the benefit to an overseas trust?

A

Trust created overseas subject to laws of that country - may be more favourable than the UK.

 May be tax advantages if not UK domiciled/deemed domiciled
 HOWEVER, Not all countries recognise trusts
 Creation of trust with foreign residence trustees is usually a transfer of value for IHT purposes

Chargeable unless;

  1. an IHT exemption arises
  2. the property is ‘excluded property’ (property located overseas and settlor not UK dom/deemed dom)

o HMRC must be told when overseas trust created

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11
Q

What is an excluded property trust?

A
  • Offshore discretionary trust for UK tax resident but not UK dom/deemed dom
  • Allows person to Ring-fence non-UK assets and protect them from UK tax on their death
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12
Q

What are the key elements of an EPT ?

A

The assets will remain excluded even if settlor is a beneficiary and later becomes dom/deemed dom providing;

 Trust created while non-dom
 Any further property only added while non-dom
 Property must be non-UK and never based in UK
 No further assets added once dom UK
 Residence status of trustees is irrelevant

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13
Q

What happens if the key elements of an EPT are satisfied?

A

 Transfers into EPT not transfers of value for IHT
 Trust not subject to periodic / exit charges
 Beneficiaries can include settlor, spouse/civil partner, children and will not be a gift with reservation
 On settlor’s death EPT outside estate

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14
Q

Establishing domicile - how is this decided?

A

Origin – permanent home of father (usually), given at birth

Choice – can move permanently to another country and break previous ties

Dependency – If domicile of father (mother if illegitimate) changes before age 16, domicile of child changes too

Deemed domicile – if UK resident for tax purposes for 15 out of last 20 tax years

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15
Q

What happens if somebody elects to be UK domiciled for IHT purposes?

A

Contingent on having a UK dom partner;

  • Transfers become unlimited between partners - not limited to £325k
  • Can inherit spouse/civil partner’s estate tax free and their transferable nil rate band / residence nil rate band

BUT would then be taxed on worldwide assets rather than just UK

NOTE - Election irrevocable, can be back dated 7years

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16
Q

What is the residence condition?

A

If born in UK, have UK domicile of origin and become tax resident in UK after a domicile of choice elsewhere, deemed domicile if UK resident in at least one of last two tax years for IHT (called a returning UK domicile)

  1. If UK domicile / deemed domicile at date of death then worldwide assets liable to IHT
  2. If non-dom then only UK-based assets liable