Life Assurance And Pensions In Trust

Question 1

Why use a life policy in trust

Answer 1

Family protection
Partnership and shareholder protection
Iht planning

Question 2

Who can be the beneficiary of a statutory trust for an own life policy

Answer 2

Spouse and children

Question 3

Who claims the benefit on a policy under trust

Answer 3

Trustees

Question 4

If the settlor of a life policy trust is alive and up resident before chargeable event what is the income tax position

Answer 4

The gain is treated as part of the settlers income

Question 5

If the settlor of a life policy in trust was dead or non uk tax resident before chargeable event and there is a UK resident trustee who is liable for income tax

Answer 5

Trustees liable at trust rates

Question 6

If the settlor of a life policy in trust is dead or non UK res at time of chargeable gain and there are no uK trustees who is liable for income tax on the gain

Answer 6

Beneficiary - no top slicing relief

Question 7

How can you avoid the trustees tax liability on a life policy in trust on a chargeable gain

Answer 7

Replace us trustees with foreign trustees if beneficiary is nil or basic rate tax payer

Assign the policy to the beneficiary before chargeable gain - top slicing will apply

Question 8

Is assignment of a life policy in trust a chargeable event?

Answer 8

No

Question 9

When is a life policy in trust liable to CGT

Answer 9

If policy assigned for actual consideration

Question 10

What is used to calculate the transfer of value for IHt on a life policy under trust

Answer 10

First premium payable is first transfer of value any further premiums are subsequent transfers

Question 11

How is the value calculated for a policy that is assigned

Answer 11

The greater of

Total premiums paid minus sums previously paid out by part surrender and the current surrender value

Question 12

What is value for iht purposes on an annuity and related life policy

Answer 12

Lower of
Price of annuity and first premium of life policy and sum assured

Or

Value of the greater benefit that the policy confers

Question 13

What is a pre owned asset tax

Answer 13

Annual income tax charge on deemed income from certain gifts made after 18/03/1986

Question 14

When is the pre owned asset tax charged

Answer 14

If the donor retains an interest in gifted property

Question 15

What are the categories of POAT

Answer 15

Land chattels and intangible assets

Question 16

What is the income threshold for POAT

Answer 16

£5000 - but it exceeds £5k then tax on full amount not just excess over £5k

Question 17

What is official rate of interest for the cash value of a benefit for POAT

Answer 17

2.5% of the asset market value on 6th April each year

Question 18

Which life policies are not exempt from POAT

Answer 18

Business trusts when settlor is a potential beneficiary

Power of appointment trusts - premiums paid since 18/03/1986

Spousal interest trusts - temporary interest in possession to spouse

Question 19

How can a donor end POAT

Answer 19

Bring benefit to an end (gift for IHt)
Dismantle arrangement
Pay a market rent for property/chattels
Opt out of POAT and elect for gift to be treated as a gift with reservation

Question 20

What are the reasons to elect for gift with reservation charge over POAT

Answer 20

May qualify for 100% business relief

If spouse exemption applies

Value of the estate is within the nil rate band

Asset owner of young and healthy

Question 21

What the reasons no to electing for gift with reservation treatment over POAT

Answer 21

Donor can afford the annual charge

Short life expectancy POAT charge less than IhT

Amount of POAT is less than £5k

Donor does not want to pass IHT burden to the donee

Question 22

What type of trust is a business trust

Answer 22

Discretionary

Question 23

What are business trusts used for

Answer 23

Share purchase
Partnership protection
For limited companies and partnerships

Question 24

How does a business trust work

Answer 24

Each owner takes out an own life policy in trust for value of their business share

Beneficiaries are the other co owners

Settlor is usually a beneficiary to cater for if they left the business

Question 25

When could a business trust be considered a gift with reservation

Answer 25

If not all business owners have reciprocal policies HMRC could argue it is gift with reservation

There needs to be a commercial arrangement

Question 26

What is a cross option agreement

Answer 26

Both parties have the option to buy or sell the deceased business share
If one party exercises their option the other party must comply

Question 27

When does business relief not apply to a business trust

Answer 27

If there is a binding contract for sale (buy and sell agreement)

Question 28

Why is there no POAT on a business trust

Answer 28

Because life policies are negligible value unless life assured is in poor health when policy is taken out

Question 29

What is the test for income and cgt on a trust which has non union trustee or settlor

Answer 29

1 uk trustee = UK resident
Settlor uK res or domiciled at set up = trust uk resident

If settlor non yo resident/domiciled = trust non UK resident

Question 30

What are the conditions of a relevant life policy

Answer 30

Sum assured must be lump sum paid on death before age 75

Must be no surrender value

I’ll health benefit can only apply during employment

Benefits must be payable to individual or charity directly or via trustees

No benefit in kind on employee

Discretionary trust should be set up at the same time

Member can make a non binding nomination of a benefit

If member ceases to be an employee and pays premiums should not be a beneficiary under trust otherwise a GWT its ok if the new employer takes over the payment

Creation of the trust is not a CLT

Question 31

Are the death benefits of pensions usually part of the estate?

Answer 31

Not usually

Question 32

What must the trustees of a dh scheme have in order to ensure the death benefit is not part of member estate

Answer 32

Discretion

Question 33

When was personal pension life cover stopped

Answer 33

6/12/06 when tax relief on premiums were withdrawn

Question 34

Who is the death benefit of a retirement annuity contract paid to

Answer 34

The estate

Question 35

What is a bypass trust

Answer 35

Trustees of a pension use their discretion to pay death benefits to a bypass trust instead of paying it to the spouse when the value is then in their estate

Question 36

What kind of trust is a bypass trust

Answer 36

Relevant property trust

Question 37

Is there IHT payable on a bypass trust

Answer 37

No iht on transfer to trust

But there is periodic and exit charges

Question 38

What is a relevant life policy

Answer 38

Life cover arranged by an employer on lives of employees

Question 39

What are the tax benefits of a relevant life policy

Answer 39

Premiums deductible for corporation tax

Not taxed on employee as a benefit in kind

Question 40

If a collective is gifted to a bare trust what are the tax implications

Answer 40

Gift is a disposal for CGT on donor

Gift is a PET for IHt purposes

Income is assessed on beneficiary at marginal rate (unless parental settlement)

CGT is assessed on beneficiary

Question 41

If a collective is gifted to a discretionary trust what is the tax position

Answer 41

Gift is a disposal for CGT unless holdover relief is claimed

Gift is a CLT for IHT

Income is charged at basic rates if within trusts standard band or higher rates thereafter. Paid out as trust income with a credit of 45%

CGT at highest rate - 1/2 annual CGT exemption applies (1/5th of 1/2 is minimum)