Topic 13 - Trusts Flashcards
Name the two types of trusts
Discretionary trusts
Interest in possession trusts
What is a discretionary trust?
A trust where beneficiaries have no legal right to income/capital
Payments are at the discretion of the trustees
What are the IT implications of a DT?
IT
Beneficiaries receive income at the discretion of the trustees
Deemed to be received net of 45% tax credit.
What is an Interest in possession trust?
Where the beneficiary has a legal right to receipt income or use a trust asset.
Known as a life time tenant
Remainderman = receives trust property when life interest comes to an end. eg Spouse has life interest, children are remaindermen.
What are the IT implications of a IIT?
Income tax:
All income is distributed and received net of 20% tax credit (7.5% where dividends are distributed)
Taxed as Non savings/savings.
Capital Taxes and Trusts:
What are the CGT and IHT consequences of putting assets into trusts?
Capital Gains Tax:
Transfer is a chargeable disposal unless it takes place on death
Proceeds = MV
Gift Holdover relief is possible
Inheritance Tax:
Lifetime transfer is a CLT
No special consequences where transfer on death -assets are taxed as part of Death estate
Assets whilst in the trust
CGT - Trustees will be subject to CGT if they sell trust assets (entitled to half AEA)
IHT- Trustees are liable to IHT every 10 years in respect of property held in trust (mx charge 6%)
What are the CGT and IHT consequences of transferring assets out of the trust?
Capital Gains tax
- Chargeable disposal
- Gift holdover relief
Inheritance Tax
- Exit Charge when capital is distributed
- Max of 6%
Gives some tax planning opportunities for trusts
- Assets no longer form part of settlor’s estate
- If assets transfer increase in value, the increase will occur outside of the settlor’s and beneficiaries estate
- Charges incurred by the trust may be insignificant company to potential savings
- Discretionary trust payments can be paid to non tax payers generating a IT repayment.
