Taxation of trusts

Question 1

what is a trust and type of trusts

Answer 1

Trust - arrangement where a person (settlor) transfers property to another person (trustee) who must manage the property on behalf of specified beneficiaries

Discretionary trust - NO beneficiary has right to income or capital - distraction of income/assets at discretion of trustees

Interest in possession (life interest) trusts - one or more beneficiaries (life tenants) has right to income generated by trust property. Life tenant does not have right to property itself. When trust comes to an end (death of LT) property trfered to another beneficiary (remainderman)

Relevant property trusts - All discretionary trust and IPTs set up during a settlors lifetime - since 22 March 2006 = RPT. - tends to affect IHT and CGT treatment of assets entering an leaving trust.

Bare trusts - property held by trustee (nominee) as its legal owner on behalf of beneficiary - if beneficiary over 18 = entitled to income and property held in BT

Question 2

Income tax - DT

Answer 2

DT :

trustees liable to IT on arising income

Trustees have BRB £500

above that all income taxed at additional rates of IT

Limit time apportioned between all trusts created by same settlor, de minimis £100 per trust

No deduction of trustees expenses

when trustees distribute income to B’s, B’s liable to IT on what they receive in tax year

amount received is net of additional rate tax - grossed up by multiplying by 100/55 before putting into B’s IT computation along with rest of income

Non-savings rates are applied to gross trust income

45% gross up is then deducted from B’s IT liability

Trustees keep track of IT they pay compared with 45% credits deducted from B’s IT liability

• if IT paid by trustees not enough to pay 45% credit claimed by B - trustees pay shortfall to HMRC
• If trustees have paid more IT than claimed as credit by B, excess cfwd to future years as a tax pool

Question 3

IIP trusts

Answer 3

T’s liable to IT at basic rate on arising income (NO PA/ Savings or dividend NRB)

B taxed on income paid by T’s grossed up for tax the trustees have already paid to HMRC

B’s IT liability is reduced by amount of gross up

If Ts have to pay fixed amount each year (annuity) - paid net of 20% IT

Question 4

IHT

Answer 4

if settlor transfers assets to a relevant party (DT or IIP set up in settlors lifetime since 22 March 2006) - trfer treated as CLT

if property remains in trust - subject to principle charge on every tenth anniversary of trusts creation

RPTs not included in death estate of beneficiary

However, assets held in an IIP which is not a RPT ( so it was created before 22 march 2006 - or - on death of the settlor) treated as if they are owned by the life tenant

If the life tenant dies - the property held in the trust is included in the beneficiaries death estate

Question 5

CGT

Answer 5

Gift to a trust:

A gift of an individual of a chargeable asset at MV

Cash not chargeable for CGT

• If gift creates immediate IHT charge because it is a CLT, settlor can claim gift relief regardless of the type of asset or whether trustees agree
• Base cost for trustees then become MV at gift less any GR claimed
• Gift on Donors death is not a chargeable disposal - settlor does not have CGT liability

Base cost = probate value

• Gifts to an IIP that is not a relevant property trust (created on death or before 22 March 2006) are treated as gifts direct to life tenant

GR only available if it is a transfer of a business asset

Question 6

Disposal by the trust

Answer 6

Gain calculated as normal for indivs

Trustees have AEA of £1500

if several trusts for same settlor - AEA split equally - minimum £300

CGT charged at 20/24% never 10%

Transfer from RPT to beneficiary = chargeable disposal by trsutees, Immediate IHT charge and GR available

Disposal by an IIP which is not an RPT - disposal by life tenant depending on asset and assuming life tenant still alive = chargeable disposal for CGT

Question 7

Taxation of bare trusts

Answer 7

Transfer of assets to a bare trust is treated as a gift - PET for IHT purposes and chargeable disposal CGT (if chargeable asset)

Disposals taxed on B (full AEA)

Income taxed on B

Transfers of assets to B is not a transfer for IHT or CGT

Question 8

Family investment companies

what ?

structures?

Answer 8

FIC = private company whose shareholders are family members and usually controlled and run by parents as directors

typically could be structured as below:

• Parents subscribe for voting shares to maintain control of the company (usually shares have restrcited rights to div and capital)
• Additional funds lent to the FIC to fund its investments

-Possible transfer by parents of shares, property or other investments into the company

• Children subscribe for shares - non voting but with rights to dividends and capital of the company
• Gifts of shares by parent to children at a later date

Question 9

Tax treatment of set up of FIC

Answer 9

Setting up of FIC not a transfer value

Transfers of cash to children to buy shares = PET by parent (No BPR as no trading activity)

Transfers by parent of existing investments = chargeable disposal (connected person so proceeds deemed at market value) and stamp taxes payable by FIC on transfers of shares/property

Question 10

tax treatment of FIC

Answer 10

• likely to be close investment holding company - pays CT on income from investments at main rate, which is lower than higher and additional rate income tax rates
• If FIC borrows to acquire investments - deduction available for interest payable

(not the case for indivs who borrowed and bought investments in shares directly and interest on loans to acquire buy to let residential property TAXED AT basic rate only tax)

Gains on disposal of inv by FIC subject to CT not CGT

On extraction of profits - recipient of dividends taxed on the income as normal - However if recipient is under 18 and div comes from inv made by parent - div taxed on parent