Taxation Of Trusts Flashcards
Bare Trust Income Tax
Trustees
Beneficiary
Settlor
….Taxed like an individual (with all allowances). Parental settlement could apply
Trustee - no liability
Beneficiary - income tax at own rates as rental,savings or dividend
Beneficiary P/A, PSA and DA all available
Settlor - No liability unless parental settlement
Bare Trust - CGT
Trustee
Beneficiary
Settlor
Trustee - no liability to CGT
beneficiary - Any gain made by trust chargeable at beneficiary rates (AEA available)
Settlor - Gift into trust is disposal for CGT.
For Bare Trust , holdover relief only available if business assets gifted.
Bare Trust - IHT
Trustee -
Beneficiary
Settlor
Trustee - No liability
Beneficiary - Trust property included in beneficiary estate. If settlor dies within 7 years, beneficiary may be subject to IHT if insufficient NRB
Settlor - gift into trust is PET, stays in estate for 7 years befor exempt
Vulnerable Beneficiaries
- 2 main types
- 3 categories of DIsabled person
- 3 categories of Relevant Minor Child
- How taxed
- 2 main types = Disable Person and Relevant Minor Trust -can be IIP or discretionary or bare
- Disabled 1, mental incapacity 2, Attendance Allowance -middle or higher rate care, higher rate mobility. Personal Independance Payment 3. Increased disablement pension4 constant attendance allowance 5 armed forces independance payment
- Relevant Minor Child. 1. Child under 18 lost at least one parent and beneficiary of one of
- Statutory Trust (parent died without will)
- Trust set up under parents will
- Trust set up under criminal compensation scheme
Trust property can only be applied for benefit of disabled/relevant minor. £3k or 3% can be applied without having to prove for their benefit
Trustees income tax liability is limited to the liability that would have been suffered by the beneficiary were the trust not in existence
What is an IIP Trust
Income Tax
Trustee -
Beneficiary
Form ?
Settlor
IIP Trust - where one or more beneficiary has right to any income the trust property generates )savings, dividends, rental) or trust property itself
Trustee - income tax at BASIC RATES 20% savings & income or 7.5%.dividend No ALLOWANCES (P/A PSA or D/A)…No entitlement to tax relief on expenses/ deducted prior to distribution (gross up)
Complete R185 and pass to beneficiary
beneficiary - Receives income taxed as rental,savings or dividend. P/A, PSA & D/A can all be used
Non tax payer can reclaim tax, BRT have liability met, HRT pay extra 20% and 25% ART of Gross income
Settlor - No liability to income tax, unless parental settlement or settlor interested trust
Trustee Expenses - How dealt with in IIP
Difference between BRT, HRT & ART
Trustee not entitles to tax relief on expenses for managing
Expenses are deductible
order - UK divs, foreign divs, savings income, other income
Take net income figure. Deduct expense, gives net income for beneficiary then gross up (this gets paid to beneficiary) - see calculations
BRT - no further liability (maybe use PSA)
HRT - owes an additional 20% (PSA)
ART - additional 25%
IIP - CGT
Trustee makes transfer to beneficiary
Rate of CGT
CGT allowance
Gift in is disposal for CGT
Trustee to beneficiary - Disposal for CGT
Holdover relief can be used as CLT since March 2006 (unless settlor interested)
Holdover relief available on assets entering and leaving trust
Pre Mar 2006 - holdover relief only on business assets
On death of life tenant pre March 2006, no CGT payable on increase in value unless holdover was claimed. CGT uplift
CGT 20% or 28% paid by trustees
CGT - half AEA (to minimums of 5 trust @ £1,200 each
IHT for IIP
Since March 2006, now treated as relevant property trust for IHT purposes (same as discretionary trust) -CLT
* Relevant property trust used to describe most IIP trusts and discretionary trusts set up after March 2006
Exceptions are IIP for vulnerable or IIP created as a result of a will or Intestacy known as IPDI
Pre March 2006 - PET. Included in estate of beneficiary. Trustee pays IHT
Post MArch 2006
- gift is a CLT. STays in settlers estate for 7 years
- possible immediate lifetime charge if exceeds NRB - 20%
- Possible 10 year charge (periodic) and exit charge
Discretionary Trusts
Income Tax - Trustees
- Trustees have standard rate band of £1,000 spread across all trusts (min £200 per trust)
7. 5% dividend, 20% other income - After Allowance 38.1% Dividends and 45% other income (like additional rates)
- Distributions subject to 45^ tax credit
- If income accumulated, no tax liability for beneficiary
- CAN’T USE ALLOWANCES classed as trust income - no PA,PSA DA
- trustee expenses allowed in working out income
Periodic charge for Discretionary Trust
Exit charge for Discretionary Trust
Periodic - Amount over NRB x 6% = Periodic charge
Effective rate is periodic charge/value x 100
Exit charge is :
Distribution multiply by x/40 (x= no. Of quarters)
Discretionary Trust
CGT
- Gift in is disposal
- Holdover relief on any asset (unless settlor interested)
- Holdover relief also available on assets leaving trust
- 20% or 28%
- Half normal AEA (shared minimum 1/5)
- losses can be transferred to beneficiary
- PPR can be claimed by trustees if beneficiary occupies house
Trustee expenses for Discretionary Trust
- Gross up Trustee expenses at either 20% or 7.5% income, take from Gross savings income
- Then tax through bands eg
£1,000 @ 20%
Expenses @ 20% (rate applicable to trust) - remainder at 45%
Example
£12,500 gross savings, £300 expenses
(Gross up expenses 300/0.8 = £375
- £12,500 - £375 = £12,125 (Gross savings after grossed up expenses)
Allocate tax: £1,000 @ 20% £375 @ 20% £11,125 @ 45% Total = £5,281.25 Beneficiary owes tax on gross income of £12,125 not £12,500
Re Vulnerable Trust
How much of trust fund can apply £ 0r %
How does favourable tax treatment get applied for
- Can apply £3,000 or 3% of Trust Fund each year without having to prove for their benefit
- Trustee and vulnerable person make joint election. No more than 12 months after 31st Jan following end of tax year- Vulnerable person election form VPE1
- Once made, election is irrevocable and remains in force until
Beneficiary cease to be vulnerable, trust ceases to be qualifying or trust is terminated
Trusts for bereaved minors
- Death of parent via will/Intestacy
- Under criminal injuries compensation scheme
- Must give absolute entitlement to income & capital at 18
- Assets treated as belonging to child for IHT purposes
- No periodic or exit charges
Offshore Trusts
Income Tax
CGT
IHT
- Liable to UK income tax if at least one trustee is UK resident
Settlor might be liable if they benefit or somebody close to them - CGT Offshore trust not liable to UK CGT. Settlor may be if they or somebody close may benefit
Or beneficiary will be if they receive a payment - IHT transfer is CLT if settlor Uk dom
If non dom when set becomes an excluded property trust - means non uk property outside UK IHT net, provided settlor or close to them cant benefit
