Module 9 Taxation Of Trusts

Question 1

How is a bare trust text for income tax

Answer 1

At beneficiaries rate
Personal savings allowance allowed
Dividend allowance allowed
Starting rate savings allowed
But parental satment rules apply if income from capital gifted by parent over £100

Question 2

How are bare trust tax for CGT

Answer 2

Holdover relief admitted its business assets
For a AEA for CGT
Taxed at beneficiaries rates

Question 3

How are bare trust tax for I HT

Answer 3

Gift is a pet
Trust forms part of the beneficiaries estate on death
If death within seven years it also impacts the settlor estate

Question 4

How is interest in possession trust tax for income tax

Answer 4

Text at basic rate
No allowances available
No liability to high rates
No relief for expenses although they can be deducted before paying the beneficiary

Question 5

How is an interest in possession trust text for CGT

Answer 5

Holdover relief available unless settlor interested trust
CGT AEA up to 50% of the full AEA
If more than one trust the AEA is shared between them to a floor of 1/5th per trust
CGT is 20%/28%

Question 6

How is an interest in possession trust text for IHT

Answer 6

The gift is a CLT
Entry periodic and exit charges may apply
The trust does not form part of the beneficiaries estate

Question 7

How is a discretionary trust taxed for income tax

Answer 7

Income falling in the standard rate band (£1000 spread across all the discretionary trusts with a minimum £200 per trust) charged at basic rate i.e. 7.5% dividend income, 20% all other income

Thereafter 38.1% for dividends or 45% all other income
No personal allowances

Question 8

How is a discretionary trust text for CGT

Answer 8

Holdover relief available unless settlor interested trust
CGT AEA up to half full AEA
If more than one trust then shared between them to a floor of 1/5 per trust

CGT is 20%/28%

Question 9

How is a discretionary trust taxed for IHT

Answer 9

Gift is a CLT
Entry periodic and exit charges may apply
Trust does not form part of the beneficiaries estate on death

Question 10

How does Tax differ if the interest in possession trust was set up before 22nd of March 2006

Answer 10

No difference for income tax
CGT
– holdover relief only permitted if it was a business assets
On death of the life tenant assets are revalued to market value at the date of death so trustees Escape any CGT liability between the outset and date of death unless holdover relief was claimed

IHT
– gift was a PET
– trust forms part of the beneficiaries estate on death

Question 11

Describe two types of vulnerable beneficiary under the finance act2005

Answer 11

Disabled person
– someone unable to administer their property or manage their affairs because of mental illness and mental health act 1983
– a person in receipt of either attendance allowance or disability living allowance due to being entitled to the highest of middle rate care component or the mobility component at the higher rate
– A person in receipt of a personal Independence payment

A relevant minor child
– under 18 has lost at least one pair parent
– trust that are eligible a either Statutory trust for the relevant minor, a trust established under the will of a deceased parent or a trust established under the criminal injuries compensation scheme which gives absolute entitlement to trust assets at age 18 and then come before then

Question 12

How is a trust for a vulnerable beneficiary taxed

Answer 12

A trustees income tax liability under a trust for a vulnerable person is limited to the tax liability that would have been suffered by the beneficiary of the trust not in existence
Two amounts need to be calculated
– the amount the Volvo beneficiary would pay if they accounted for the tax
– the amount the trustee would pay

The trustees and the Volvo person must make a joint election no more than 12 months after 31st of Jan following the end of the tax year – this is Sara vocable

Question 13

Interest in possession trust
In respect of the tax payable what is the form which the trustee completes and passes to the beneficiary to reconcile tax

Answer 13

R185

Question 14

What is the situation with trustee expenses on an interest in possession trust

Answer 14

Trust it is not entitled to tax relief on expenses for managing the trust
Trust expenses are deductible in arriving at the beneficiaries income
– deducted in set order
– – UK dividends, foreign dividends, savings income, other income
Higher/additional rate tax due by beneficiary is paid on income received after deduction of expenses

Question 15

Explain the situation as regards expenses on a discretionary trust

Answer 15

These are allowable and calculating the income chargeable (unlike an interest in possession trust)
– expenses are set first against dividend income, then savings income and then other income
– expenses are grossed up at the rates appropriate to the income they are set against (i.e. 7.5% dividend income, 20% otherwise)
If Trust has exempt income, allowable expenses reduced in proportion to it
Premiums on life policies and investment advisor fees are not allowable expenses

Question 16

Taxation on the beneficiary of a discretionary trust

Answer 16

Only liable if I distribution is made out of the trust to them
Income paid out as trust income and carries a 45% tax credit
– personal savings allowance starting rate for savings income and dividend allowance therefore of no use
Because some income will fall within standard rate band and thereafter dividend income is only taxable at 38.1% when income distributed becomes trust income at 45% – the trustees must pay the additional tax to cover the 45% tax credit

Nontaxpayer can reclaim the 45% tax paid. Basic rate taxpayer can reclaim 25% tax and higher rate taxpayer 5%. An additional rate taxpayer has nothing more to pay but cannot reclaim anything

Any reclaim is made by completing form R 40

If the trustees decide to accumulate income rather than pay it out, the tax paid on that income is carried forward in a tax Paul
– if that income is then distributed in later years the brought forward Text is available to Frank the 45% tax credit and therefore reduces any additional liability the trustees may have on distributions of dividend income where the 45% tax credit exceeds 38.1% tax the trustees must pay on that income

Question 17

What is the situation as regards Settler/parental interested trusts for a discretionary trust

Answer 17

Parental settlement and settlor interested rules apply

Question 18

Describe the two types of vulnerable beneficiary under the Finance act 2005

Answer 18

A disabled person
– someone unable to administer property or manage their affairs because of a mental illness within the meaning of the mental health act 1983
– a person in receipt of either attendance allowance of disability living allowance due to being in Entitled to the highest or middle rate care component for the mobility component at the higher rate
– a person in receipt of a personal Independence payment

Or a relevant minor child
– an under 18 who has lost at least one parent
– trusts that are eligible or other statutory trusts for the relevant minor, I trust established under the will of the deceased parent or a trust established under the criminal injuries compensation scheme which gives absolute entitlement to trust assets at age 18 and income before then

Question 19

How is a trust for a vulnerable beneficiary text

Answer 19

A trustees income tax liability under a trust for a vulnerable person is limited to the tax liability that would have been suffered by the beneficiary where the trust is not in existence
Two amounts need to be calculated
– the amount the fundable beneficiary would pay if they had to account for the tax (this will normally be smaller than the amount the trustee would pay)
– the amount the trustee would pay if they had to account for the tax

– Take the form away from the latter to give the relief the trustee can claim

The trustees and vulnerable person must make a joint election to be subject to final tax treatment no more than 12 months after 31st of January following the end of the tax year in which the effective date of the election falls

Once made the election is irrevocable and remains in force until beneficiary ceases to be a vulnerable person, Trust Assist is to be qualify, or trust is terminated