Trusts Flashcards
How can a trust be setup?
(Quick fire x6)
Aa deed of trust
Orally
Under the terms of a will
Statute e.g. when someone dies intestate and there is a minor child
The court as in the case of damages awarded to someone who has been badly injured in a car accident.
It can also be created by the actions of individuals that imply that they wish to set up a trust.
What are the main uses of a trust?
(Quick Fire x4)
A Tax Planning Tool
Allow Settlor (donor) to maintain some form of control
Enable property to be held for those that cannot legal hold it
Enable different people to benefit in succession
What is a “Settlor” in relation to trusts?
(Quick Fire x4)
Gifts the original “property” into the trust
Chooses the type of trust to setup
Chooses the initial beneficiaries
Appoints the Trustees
What is a “Trustee” in relation to trusts?
(Quick Fire x4)
Legal owners of Trust property
Must run the trust for the benefit of the beneficiaries
Can be any number of Trustees
Can be a Professional or Lay Trustee
What is a “Beneficiary” in relation to trusts?
(Quick Fire x3)
Equitable / beneficial owner(s) of Trust property
May be entitled to Income, Capital or Both
Can be named or described by family relationship
What are the conditions for a Beneficiary to end a Trust?
(x4 Conditions)
Under Saunders v Vautier (1841) beneficiaries can bring a trust to an end providing:
all beneficiaries are ascertained
no possibility of further beneficiaries
all of full age and mental capacity
all agree
What can (and can’t) be trust property?
Most property can be placed under trust (not ISAs though).
This includes Property, Land, Chattels, Life Insurance, Shares, Jewellery, art etc
How are Investment Bonds treated in a Trust?
(Quick Fire x5)
No income therefore no need to self-assess until a chargeable gain occurs
Benefit from 5% tax-deferred withdrawals
Can assign to beneficiary prior to chargeable event so can be taxed at their rates
Onshore bond (20% tax at source)
Offshore bonds: benefit from gross roll up
How are Collectives/Shares treated in a Discretionary Trust?
Selected for income and/or growth depending on needs of beneficiary
Under discretionary trust taxed at 39.35% (dividend income), 45% (all other income) in excess of standard rate band.
CGT at 20% in excess of up to 1/2 usual annual exempt amount to min 1/10th.
Appointment of trustees (at outset) - 3 most likely scenarios are?
Names (appointed by) in trust deed
Named in will (usually the executors
Administrators (intestacy)
Appointment of new trustees to replace another - Trustee Act 1925, s.36 - key points:
(Quick Fire Reasons x6)
Under the Trustee Act 1925, s.36 a new trustee can be appointed to replace one who:
- Has died
- has been outside the UK for more than a year
- Wants to be discharged
- Refuses to act
- Is unfit or incapable of acting
- Is a minor
What is a Discretionary Trust?
Type of relevant property trust
No beneficiary has the right to income or capital
Trustees have power to accumulate or distribute income / capital at their discretion
May be subject to IHT lifetime, periodic and exit charges
What is a Bare Trust?
Assets transferred by settlor to legal ownership of trustee
Benefit of beneficiaries absolutely
Taxed at beneficiaries their marginal rates
What is a Life interest Trust or Interest in Possession Trust?
Donor / IIP has a right to income of the trust or the right to use trust assets
Beneficiaries are life tenant(s) and remainderman(men)
Basic Rate Taxation (No Inc / Divi allowances appliable) + CGT at 20%
What is a Accumulation and Maintenance Trust?
Used to enjoy beneficial IHT treatment
One or more beneficiary becomes legally entitled to capital/income prior to 25
Prior to that income held by trustees but can be applied for maintenance / education / benefit of beneficiary
Could last no longer than 25 years unless set up for benefit of grandchildren of a common grandparent
What is the “Effective Rate” in relation to Trusts and IHT?
Effective Rate = (Periodic Charge / Value of Trust)
Example
The Rice trust paid a £12,000 periodic charge. The value of the trust was £525,000
The effective rate is £12,000/£525,000 which is 2.286%.
What is the Periodic Charge?
(Quick Fire x3 + Example)
IHT periodic charge = 6% of value above NRB.
Example - £400,000 Assets:
£400,000 - £325,000 = £75,000 /// £75,000 x 30% x 20% = £4,500.
Correct Formula Note (Unlikely to show in exam)
Full Calc = Trust Value / (NRB LESS CLTs setup within 7 years of start LESS Capital paid out past 10 years)
What are IHT Exit Charges?
(Charging Structure)
An IHT exit charge is payable every time a capital distribution is made or appointment is made to a beneficiary.
IHT Exit Charge Formula = ((Withdrawal x Effective Rate) x Whole Quarters / 40)
Effect Rate Formula = ((Tax Charge / Fund Value) x 100)
Example - Distribution of £300,000.
£400,000 Fund at year 10. Grown to £450,000 after 11 years and 8 months.
Effective Rate = ((£4,500 / £400,000) x 100) = 1.125%
Exit Charge = £300,000 x (6/40) x 1.125% = £506.25 tax payable.
What is Gift With Reservation (GWR)?
(Plus most common example)
GWR arises when someone gives an asset to someone else, hoping to escape an IHT liability - but continues to use the asset as if it were still theirs.
The most common scenario is gifting a property/ second home to children but continue staying their without paying market rent.
What is a “Absolute Interest” Beneficiary entitle to?
Both Capital and Income
What is a “Life Interest” beneficiary entitled to?
Income Only
What is a “Remainderman” beneficiary entitled to?
Capital after death of Life Interest
What is a “Contingent” beneficiary entitled to?
Interest depends upon particular event.
Examples of a Charitable Trust?
(Quick Fire x5)
Community Advancement / Benefits
Human rights
Conflict resolution and reconciliation
The advancement of education
Religion / Health
Amateur sport / Animal Welfare
Environmental protection and improvement
Science & Culture / Arts & Heritage
The promotion of the efficiency of the armed forces of the Crown
What are Trust Management Expenses?
These are expenses incurred by trustees.
e.g. Financial Advice or Legal fee costs.
How do IIP Trusts and Trust Management Expenses (TME) mix?
Cannot be offset - Reduces income received.
It is grossed up. Example. £10,000 Earned:
- 10,000 - 2,000 (Basic Rate).
- 8,000 - 500 (TME Removed)
- 7,500 paid to beneficiary
- Reported to HMRC by grossing up to £9,375 (Form R185)
How do Discretionary Trusts and Trust Management Expenses (TME) mix?
Reduces amount of tax payable at Rate Applicable to Trusts (RAT)
Calculate Tax first and then remove the Grossed up TME (Reverse Income order)
How do Bare Trusts and Trust Management Expenses (TME) mix?
Not allowed to offset any TMEs.
Can you use the Annual Gift Exemption for IHT towards Trust Gifts?
Yes you can. For all types of trusts.
How much IHT is payable at establishment of a trust?
20% if paid by trustees.
25 if paid by settlor.
How much Basic Rate is available for a Discretionary Trust?
£1,000 max to a minimum of £200
Based on total trusts made by settlor (1,000 / trust made)
