Trust Taxation Flashcards
How do you calculate periodic charges on discretionary trusts?
- Current Value of Trust - Nil Rate Band = A
- A x 30% x 20% = Charge (B)
To get the effective rate of the charge…
B/Current Value x 100 = Effective Rate
How to you calculate the initial charge on a discretionary trust?
Only if transfer is above NRB
(Value of transfer - Nil Rate Band) x 20%
If the settlor pays the tax on transfer then..
(Value of transfer - Nil rate Band) / 0.8 x 20%
How do you calculate what exit charge is due on a discretionary trust?
Value of transfer x quarters/40 x Effective Rate
For an 18-25 trust the period starts at age 18
What differentiates and Trust from a Contract?
Trust
No offer and acceptance needed
Beneficiaries may not even be aware of trust
No consideration needed
Minors can be beneficiaires
Trustees are legal owners of assets, Beneficiaries are beneficial owners and can enforce things on the trustees
What differentiates and Contract from a Trust?
Contract
Offer and acceptance are required
Consideration required
All parties must be aware of the arrangement
A contract with a minor is unenforceable
Only those party to the contract have a legal entitlement
What is the taxation treatment for an Interest in Possession Trust?
NO STARTING RATE BAND
Basic rate Tax on everything so…
Savings Income @ 20%
Dividends @ 7.5%
Other Income @ 20%
Trust expenses deducted from dividends first before getting beneficiaries income
Any further tax due by beneficiaries is paid on net income received, LESS the grossed up trust expenses
Probably easier for admin to mandate income DIRECTLY to beneficiaries to avoid any tax reclaim etc.
What is the taxation treatment of a Discretionary Trust?
Discretionary Trusts get £1,000 starting rate band (Basic Rate) to apply to income
Dividends in the starting rate band @ 7.5%
Other income in the starting rate band is at 20%
Anything over £1,000 is chargeable at trust rates (Additional Rate)
That means dividends at 38.1% and everything else at 45%
Income paid to beneficiary comes with a 45% tax Credit (assumed tax paid)
If the beneficiary has lower tax rates then they can claim it back
How are Charitable Trusts different?
Not subject to the law on perpetuitites
Can only accumulate income for 21 years though
Cannot be voided for uncertainty of trust
Can be reassigned to another similar charitable purpose
Exempt form Income Tax and CGT
Gifts to charitable trusts are exempt from IHT
When can a trustee be replaced?
When a trustee….
Dies
Remains out of the UK for over a year
Wants to be discharged
Refuses to act
Is unfit or incapable
Is a minor
How are trustee expenses deducted from trust income?
Deducted from gross income received before being taxed and distributed
Tax credit for this is based on the amount of expenses grossed up.
How does a Discounted Gift Trust work?
Donor make a lifetime gift to a bare trust (PET) or discretionary trust (CLT)
Donor then receives a fixed income for life from the trust
The income is given a capital value based on life expectancy and income payments
This capital value is the amount by which the gift is discounted
And leaves the estate all together
Usually invested in a bond and the 5% tax deferred withdrawals are the fixed income payment (return of capital)
Any growth on the bond is outside the estate for IHT
Best for those with long life expectancy and will spend the fixed income they receive
How is the discount for a DGT calculated ?
Actuarial calculation
Expected payments until death
Frequency of payments
Age of settlor
Health of settlor
Life office decide the discount but HMRC can decide this if death within seven years
How does a loan trust work?/
Donor makes a loan to the trust
Will be a CLT, and loan used to fund a bond
The loan is paid back in instalments
Any growth is outside the estate for IHT
Fixed loan repayments are made that reduce the overall debt
On death, any remaining debt must be paid back to the estate
So long as loan repayments are spent then the debt repaid will be less than the original gift
