Life Assurance And Pensions In Trust Flashcards
Why use a life policy in trust
Family protection
Partnership and shareholder protection
Iht planning
Who can be the beneficiary of a statutory trust for an own life policy
Spouse and children
Who claims the benefit on a policy under trust
Trustees
If the settlor of a life policy trust is alive and up resident before chargeable event what is the income tax position
The gain is treated as part of the settlers income
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
Trustees liable at trust rates
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
Beneficiary - no top slicing relief
How can you avoid the trustees tax liability on a life policy in trust on a chargeable gain
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
Is assignment of a life policy in trust a chargeable event?
No
When is a life policy in trust liable to CGT
If policy assigned for actual consideration
What is used to calculate the transfer of value for IHt on a life policy under trust
First premium payable is first transfer of value any further premiums are subsequent transfers
How is the value calculated for a policy that is assigned
The greater of
Total premiums paid minus sums previously paid out by part surrender and the current surrender value
What is value for iht purposes on an annuity and related life policy
Lower of
Price of annuity and first premium of life policy and sum assured
Or
Value of the greater benefit that the policy confers
What is a pre owned asset tax
Annual income tax charge on deemed income from certain gifts made after 18/03/1986
When is the pre owned asset tax charged
If the donor retains an interest in gifted property
What are the categories of POAT
Land chattels and intangible assets
What is the income threshold for POAT
£5000 - but it exceeds £5k then tax on full amount not just excess over £5k
What is official rate of interest for the cash value of a benefit for POAT
2.5% of the asset market value on 6th April each year
Which life policies are not exempt from POAT
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
How can a donor end POAT
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
What are the reasons to elect for gift with reservation charge over POAT
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
What the reasons no to electing for gift with reservation treatment over POAT
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
What type of trust is a business trust
Discretionary
What are business trusts used for
Share purchase
Partnership protection
For limited companies and partnerships
How does a business trust work
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
When could a business trust be considered a gift with reservation
If not all business owners have reciprocal policies HMRC could argue it is gift with reservation
There needs to be a commercial arrangement
What is a cross option agreement
Both parties have the option to buy or sell the deceased business share
If one party exercises their option the other party must comply
When does business relief not apply to a business trust
If there is a binding contract for sale (buy and sell agreement)
Why is there no POAT on a business trust
Because life policies are negligible value unless life assured is in poor health when policy is taken out
What is the test for income and cgt on a trust which has non union trustee or settlor
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
What are the conditions of a relevant life policy
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
Are the death benefits of pensions usually part of the estate?
Not usually
What must the trustees of a dh scheme have in order to ensure the death benefit is not part of member estate
Discretion
When was personal pension life cover stopped
6/12/06 when tax relief on premiums were withdrawn
Who is the death benefit of a retirement annuity contract paid to
The estate
What is a bypass trust
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
What kind of trust is a bypass trust
Relevant property trust
Is there IHT payable on a bypass trust
No iht on transfer to trust
But there is periodic and exit charges
What is a relevant life policy
Life cover arranged by an employer on lives of employees
What are the tax benefits of a relevant life policy
Premiums deductible for corporation tax
Not taxed on employee as a benefit in kind
If a collective is gifted to a bare trust what are the tax implications
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
If a collective is gifted to a discretionary trust what is the tax position
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)
