Taxation Of Trusts Flashcards
Beneficiaries
Are the equitable owners of the trust property
Life Interest Trust
Carved out separate rights to income and capital. It provides a right to income to the life tenant. On the death of the life tenant the remainder men have a right to the capital
How to end a trust
To bring a trust to an end; all beneficiaries must be identified, there must be no possibility of any further beneficiaries. All beneficiaries must be of full age and capacity and there must be unanimous agreement amongst the beneficiaries
Bare Trust - Advantages & Disadvantages
✅simplicity
✅certainty of beneficiary
❌inflexible in terms of who can benefit
❌beneficiaries can enforce payment at 18
Discretionary Trust - Advantages & Disadvantages
✅income and capital distributed when trustees wish
✅can amend beneficiaries
❌greater trustee involvement
❌increased complexity
Periodic Charge
6% of assets value + capital out - NRB
Trust Income (how is it taxed)
First £1j is classed as standard rate band and taxed at either 7.5% or 20%
The £1k limit is split between the number of trusts the settlor has subject to a £200 minimum.
Income in excess of this is taxed at 38.1% or 45%
Expenses are only allowable if they are properly chargeable to income
Trust Annual Exemption
Is half the personal CGT allowance - £5850
Trustee delegation
A trustee can delegate all their powers to any attorney by POA under the trustee act. The delegation cannot be for more than 1 year. The trustee remains liable for the actions of the attorney.
The trustee can delegate certain powers to an agent and providing duty of care has been exercised the trustee is not liable for loss.
Main duties of trustees
Trustees must hold the title deeds/be registered owners
Trustees have a duty to maximise the return on a fund and use diligence to avoid loss.
Trustees must keep property accounts
Trustees must provide the beneficiaries with info
Trustees must carry out their role with a duty of care
Trustees must act in a way an ordinary business man would
Trustees must have the same types of investment, as if it were their own
Trustees must invest in line with the trust
Trustees must have regard for the suitability of the investments and need for diversification
Trustees must consider getting proper advice
Trustees must review investments regularly
Trustees must avoid conflict of interest
Trustee tax return
Trustees are liable for tax and must complete a self-assessment tax return
The trustees are jointly & severally liable for tax and any unpaid tax can be personally recovered from any of the trustees. This means they pay on account and balancing payments throughout the year.
Qualifying Trust - how to set up
Must be set up under the will of a deceased parent of the relevant minor (same applies to disabled)
Must have absolute interest at 18
During the vulnerable beneficiaries lifetime the income and capital can only be used for their benefit except for 3% of the trust or £3k whichever is lower.
Qualifying trust - favourable tax treatment
The favourable tax treatment can be obtained by the trustees and vulnerable beneficiary making a joint election. The election is irrevocable until beneficiary is no longer vulnerable or no longer qualifying. For this tax year it must be made by 31/1/21
Qualifying trusts - the tax bill
For qualifying trusts the income tax is calculated by deducting the tax the beneficiary would pay. The difference is the amount the trustees liability is reduced by. This is limited to the amount of tax the beneficiary would pay with no trust in place.
Tax pooling
Is a build up of all the tax paid within a trust
The trustees keep a record
The moment a distribution is made it carries a 45% tax credit
If the cumulative tax credits I. The trust are more than the tax paid then the trustees have more tax to pay
