Taxation Of Trusts Flashcards
How are trustees assessed on income tax (the process)
🤨 Completion of self assessment tax returns - income and gains
🤨 Make interim payments on account based on previous years income tax
🤨 Interim payments by 31 Jan in year of assessment and 31 Jul in year following
🤨 Final balancing payment on 31 Jan following tax year -along with CGT liability
🤨 All trustees jointly and severally liable for tax due
🤨 Jointly responsible for acts/omissions of individual trustee chosen to deal with HMRC
🤨 Unpaid tax can be recovered from any trustee
🤨 Any trustee personally liable to penalties incurred while trustee
How is a transfer to a interest in possession trust treated for IHT?
PRE 22/03/2006
🧐 PET - generally regarded as owned by beneficiary split across beneficiaries - fall in value relief
POST 22/03/2006
🧐 CLT - subject to entry, periodic and exit charges
Settlor interested trust how taxed for CGT?
Capital Gains taxed on trustees
Gains above Annual Exempt Amount/£6,150 (apportioned between other trusts min 1/5 ££1,230) taxed at trust rates of
Residential property: taxed at 28% if not principal private residence
Shares etc.: 20%
Hold over relief does not apply
How do trustees report and pay CGT on a discretionary trust?
Report gains in excess of applicable annual exempt amount
If residential property must report to and pay HMRC within 30 days
Use online real time service
Other gains via self assessment by 31 January in the following tax year of disposal
Income tax on Interest in Possession trusts
Interest and dividends paid gross
Trustees pay BRT Savings 20%, dividends 8.75%
PA/Dividend Allowance/PSA not available to trustees
Paid by trustees by self assessment
Beneficiary entitled to tax credit for tax paid by trustees
HRT/ART may be liable for further tax
Non-taxpayers can reclaim some/all
PA/dividend allowance/PSA available to beneficiaries
Trustees send R185 to beneficiaries
How are expenses dealt with when calculating taxable income?
Trustees not entitled to tax relief on expenses
Can be offset against net trust income
Set against income in following priority order:
🇬🇧 UK dividends
🌎 Foreign dividends
💰savings income
🏡 other income
How is IHT calculated on creation in to a relevant property trust?
Creation of a relevant property trust is a CLT
IHT will be payable at lifetime rate of 20% (remember to use tax tables)
If transfer into trust takes settlors cumulative total of chargeable gifts over the current NRB/£325,000 in the past 7 years.
The settlor may have use of the annual exemption of up to £3,000 for current tax year and up to £3,000 for previous tax year.
If settlor pays tax must be grossed up as the IHT is based on total loss to estate which if paid by settlor would include the tax. Amount/0.8 deduct from net figure to get tax charge
How are exit charges calculated on a relevant property trust?
During 1st 10 years:
30% of lifetime rate (20% x 30% = 6%
Charged on hypothetical transfer by settlor using cumulative gifts in 7 years prior to trust creation.
Only x/40 of the full tax is charged - Number of 1/4 held in trust divided by 40 (max 40 as this is 10 years)
After 10 years:
Rate used from last periodic charge but apply the x/40
When is IHT potentially payable on a relevant property trust during lifetime?
Creation
Exit = capital distribution or appointment of capital to a beneficiary (not payment treated as income)
10 years
How are disposal of shares during the administration period treated by personal representatives?
Personal representatives liable for CGT at 20% on disposal during admin period
Liable for CGT on gain made post-death - balance between post death gain and annual loss exempt amount (use figures given in the example)
Deemed to have acquired shares at market value at date of death (probate value)
Entitled to a full CGT annual exempt amount
If settlor died in previous tax year how are gains taxed on an onshore single premium life assurance bond in disc trust?
Gain will be assessed to income tax on trustees
Trustees eligible for starting rate band of £1,000, usually taxed at 20%
Notional 20% tax credit offset against income tax liability
Remaining gain taxed at trustees rate of 45% applicable to trusts but can offset tax credit
Topslicing not avaliable
How is income tax dealt with on a Bare Trust (5)?
Income belongs to beneficiary
Taxable at their rate
If money comes from a parent (not grandparents or others) and income is over £100pa (minor and unmarried) all taxed on parent not just excess over £100
Beneficiary liable for tax, not trustees
Must include on beneficiary tax return
How is CGT dealt with for a Bare Trust? (5)
Gift is disposal on transfer to trust
Holdover relief only available on business assets
Taxed on beneficiary
Can use full annual exempt amount
Transfer to beneficiary not a disposal as absolutely entitled.
How is IHT dealt with on a Bare Trust? (4)
Gift into trust = PET
Remains in settlors estate for 7 years after which not chargeable
Assets for part of beneficiary estate
Taper relief applies consider term assurance to protect for death within 7 years
How are trusts for vulnerable beneficiaries taxed?
Income and gains taxed on beneficiaries position
Trustees and vulnerable person must make a joint election to get favourable tax treatment no more than 12 months after 31/01 following end of the tax year in which effective date of election falls
Irrevocable once made - until ceases to be vulnerable, ceases to be a qualifying trust , trust terminated
Trustees an make a deduction from income tax:
Tax trustees would pay - tax vulnerable beneficiary would pay = relief
