Taxation of Trusts

Question 1

Bare Trusts - Income Tax

Answer 1

• Assets are held in the name of the nominee but asset and income belong to beneficiary
• Income taxable on beneficiary at appropriate rates - can use own tax allowances
• Parental settlements - income taxed on parents where over £100 per parent on trusts for an unmarried minor

Question 2

Bare Trusts - CGT

Answer 2

• taxed on beneficiary even if parental settlement

Question 3

Bare Trusts - IHT

Answer 3

• Transfer is a potentially exempt transfer (PET)
• Trust fund is in the estate of the beneficiary
• If settlor dies within 7 years, it comes back into estate - gets first call on NRB
• Taper relief can reduce tax
• Beneficiary liable to pay tax

Question 4

Interest in Possession Pre-2006 - Income Tax

Answer 4

• trustees liable for basic rate tax 20%
• Dividend allowance does not apply. Tax is levied at 8.75%
• tax on other income at 20% via self-assessment
• trustees don’t pay HRT but beneficiarys may be liable
• no personal allowance for trustees but beneficiaries can use their own PA on income received
• no tax relief for trustees on trust expenses but can be used by beneficiary to avoid any higher or additional rate liability
• beneficiary gets a tax credit for basic rate tax - non tax payers can reclaim, higher and additional pay more.

Question 5

Interest in Possession pre-2006 - CGT

Answer 5

• on death of a life tenant, assets rebased except any held-over gain
• trustees pay tax at 20% (28% for property)
• trust has annual exemption of half of the standard rate - £12,300 = £6,150
• where more than one trust, rate split between trusts down to minimum of 1/10th of standard rate

Question 6

Interest in Possession pre-2006 - IHT

Answer 6

• transfer was a PET
• potential tax charge if settlor dies within 7 years - trustees liable
• assets regarded as owned by beneficiary with interest in possession
• any changes to IIP now would be a chargeable lifetime transfer (CLT)
• taper relief can reduce tax

Question 7

Interest in Possession Post 2006 - Income Tax

Answer 7

• trustees liable for basic rate tax 20%
• Dividend allowance does not apply. Tax is levied at 8.75%
• tax on other income at 20% via self-assessment
• trustees don’t pay HRT but beneficiarys may be liable
• no personal allowance for trustees but beneficiaries can use their own PA on income received
• no tax relief for trustees on trust expenses but can be used by beneficiary to avoid any higher or additional rate liability
• beneficiary gets a tax credit for basic rate tax - non tax payers can reclaim, higher and additional pay more.

Question 8

Interest in Possession Post 2006 - CGT

Answer 8

• trustees pay tax at 20% or 28% for property
• trust has annual exemption of half of standard rate (£6,150)
• where more than 1 trust, rate split between trusts to min of 1/10th of standard rate (£1,230)

Question 9

Interest in Possession Post 2006 - IHT

Answer 9

• transfer is chargeable lifetime transfer
• potential tax charge on settlement (20%)
• subject to periodic and exit charges unless disabled persons trust or immediate post death interest

Question 10

Trusts for Vulnerable Beneficiaries - Income Tax

Answer 10

• trusts for disabled persons and relevant minors
• once qualified, income taxed as belonging to the beneficiary even where the trust structure is discretionary

Question 11

Trusts for Vulnerable Beneficiaries - CGT

Answer 11

• taxed at the rate applicable to beneficiary - so 10% / 20% (or 18% / 28% for property)
• Full annual allowance applies to disabled persons trust where trusts for vulnerable beneficiaries treatment doesn’t apply

Question 12

Trust for Vulnerable Beneficiaries - IHT

Answer 12

• creation is a Potentially Exempt Transfer (PET) - even if a discretionary trust
• no periodic or exit charges
• possible to create a self interested trust on this basis if you can prove you have a condition which will lead to a disability in the future.

Question 13

Discretionary Trust - Income Tax

Answer 13

• trust has a standard rate band of £1000
• income within this band subject to tax at 20% (or 8.75% for dividends)
• where settlor creates more than one trust, the band is divided by the number of trust down to a minimum of £200
• income above standard rate band is taxed at the rate applicable to trustees (45% or 39.35%)
• trustees expenses are allowable, but only reduced tax to 20%

Question 14

Discretionary Trust - CGT

Answer 14

• trustees pay tax at 20% or 28% for property
• trust has annual exemption of half of standard rate (£6,150)
• where more than 1 trust, rate is split between trusts down to 1/10th of standard rate (£1,230)

Question 15

Discretionary Trust - IHT

Answer 15

• transfer is chargeable lifetime transfer (CLT)
• potential tax charge on settlement 20%
• subject to periodic and exit charges unless disabled persons trust or immediate post death trust interest