Tax Planning Flashcards
1
Q
Loan Trust
What is it
- When good for
A
- Loan trust good for first try at IHT planning
- Outstanding loan remains in settlors estate - control
- Growth not included in estate
- Can take income eg 5% of bond - investment typically investment bond
- Loan can be waived (in part) at any time (could waive £3k annual exemption/ £6k joint
- Normally has to be set up with new monies
2
Q
How is Loan Trust set up
A
- Loan made to trustees - Interest free
- Trust must be set up first, Trustees then buy the bond (ok to have dated same day)
- Can normally top up existing loan either by further loan or gift
- Settlor has full access to loan but nothing else. Joint cases -goes to survivor
- Absolute or Discretionary Trust. Absolute= Beneficiary can demand funds at 18. Trustees legally obliged to tell beneficiary existence of fund. Then form part of their estate for IHT
- Discretionary. Up to Trustees. No right. Does not form part of estate as within trust
- Only transfer of value when Loan Trust set up - just loan
- Amount waived is either a PET or CLT
- With CLT , if waived amount takes over NRB, then entry charge
3
Q
What is a Discounted Gift Trust
- Advantages & Disadvantages
- benefit
- Underwriting
A
- DGT is trust based IHT planning arrangement using Investment Bond.
- Withdrawals of capital for rest of life
No income tax on withdrawals (5% tax defer( - For those wanting to gift but not completely give up access
- Value transferred is less than amount of investment “discount” (because settlor is entitled to a stream of payments)
- Transfer amounts is gift less the future income stream. Income is classed as return of capital
- Can be Bare (PET) or Discretionary (CLT)
- Potential for immediate discount, outside after 7 years,growth outside estate
- underwriting consider level of income, age, health (anybody over 90 not entitled to discount)
- Disadvantages- payments can’t be varied, withdrawals unspent will increase estate, full underwriting required. Settlor cant access residual fund.
- Advantages - immediate discount, whole gift outside estate in 7 years. Can invest more than NRB without paying entry charge, growth outside estate, withdrawal for life
4
Q
Married Women’s Property Act 1882
What are conditions (7)
A
Conditions of MWPA 1882
- policy on own life basis
- policy must be written into trust at outset
- must be life policy
- Benefit must be for spouse/civil partner
- policyholder need not be married
- no need to be resident/domiciled in Englan/Wales
- No need to name act in policy for it to take effect
5
Q
Trustee making a claim on life policy
- What needed and any additional requirements to be followed if life office agrees to request of paying proceeds directly to trusts beneficiary
A
- Provide life office with trust deed and policy document
- may need to provide deed appointment for new trustee or deed of retirement if any
- Life office will ask trustee to sign a form of discharge to acknowledge policy paid out
- If life office agrees to pay direct to beneficiary, trustees need to sign discharge form
6
Q
What is a cross option agreement
A
- Surviving partners have option to but deceased’s share of partnership
- Deceased’s personal representatives also have option to sell
- If either party decide to exercise option, other must comply (as long as writhing timescale)
- If in partnership for more than 2 years, qualify for BR at 100%
7
Q
How do you set up a spousal bypass trust for pension benefits
A
- Establish trust with small gift eg £1
- Beneficiaries are souse, civil partner, children and grandchildren
- beneficiaries can receive payments or loans at trustee discretion
- Surviving spouse is trustee so has some control
- Settlor should draw up a letter of wishes
- Does not form part of estate on death
- No IHT when death be benefits paid into trust
- May be periodic or exit charges
8
Q
Advantages of providing life cover for indefinite period by writing W.O.L in trust
- If life assured dies, what procedure does trustee undertake
A
- advantages of writing a W.O.L in trust - ensures correct beneficiaries receive proceeds
Removes proceeds from estate and allows payment free of IHT
Speeds up process of payment as trustee doesn’t have to wait for probate to be granted
Retains control over who proceeds are paid to through choice of trustees
Protects value of policy from creditors - If life assured dies
Trustee makes a claim to life office for sum assured
Provide proof of title eg trust deed, deed of appointment, death certificate and policy document
Distribute the benefits for beneficiaries according to terms of trust
9
Q
Explain main features of a Discounted Gift Trust
A
- Gift of capital/investment under trust, with right to income
- Level of income fixed from outset
- immediate reduction in value of estate because of actuarial discount due to capital value of right to income retained
- Underwritten
- Health, age and amount of income considered
- Good health = more discount
- Can be joint
- Only value of initial transfer ,less discount forms part of estate in event of death in 7 years
- Investment growth outside estate
10
Q
Main features of a Loan Trust
A
- Trust fund/investment is created by way of loan. No transfer of value, no immediate IHT liability
- No reduction in IHT as loan is outstanding debt to estate. No impact on settlors NRB
- Growth outside estate from outset
- Settlor retains right to income/capital in form of loan repayments
11
Q
Life policy in trust to cover IHT
How could it maximise IHT exemptions
A
- Normal expenditure exemption can be used if premiums paid out of regular surplus income so standard of living not affected
- Annual exemption can also be used to cover premiums
12
Q
6 specific factors to consider with Interest in possession trust for death of life tenant established in 2002. 4 minor grandchildren at school
- What should trustees review
A
- IHT implications as policy was pre March 2006, trust assets form part of his estate
- Appropriateness of trust assets/investment strategy/ ATR - whether to switch to growth from income
- Needs of grandchildren, ages and tax position
- Consider possible appointment of capital to them or close trust
- consider changes in legislation,taxation or economic
- Review trustee/ appointment of additional trustee
13
Q
Flexible Reversionary Trust
- Advantages and disadvantages
A
Advantages -
- Gift for IHT purposes but retain right to income
- GWR or POAT rules do not apply
- Transfer outside estate after 7 years
- Settlor can receive annual payments if required
- Payments made to beneficiaries at trust discretion
- Growth outside of estate
Disadvantages
- Transfer remains in estate for 7 years
- Immediate charge to IHT if CLT exceeds available NRB
- No discount like CGT
- AT surrender, maturity, gain subject to income tax
- unable to take 5% while settlor lives
