Trusts

Question 1

Whose liability is income/capital gains tax for the following types of trust:
Bare
Discretionary
Interest-in-Possession

Answer 1

Bare - beneficiary’s
Discretionary & IiP - trustees’

Question 2

How is income tax paid within an IiP trust?

Answer 2

Paid at a flat basic rate, with residual net income distributed to life tenant with a BRT tax credit. Life tenant can then reclaim/do nothing/pay remainder as appropriate

Question 3

How is the Standard Rate Band utilised across multiple discretionary trusts?

Answer 3

£1000 split between all trusts, down to a minimum of £200 per trust

Question 4

How is income tax paid within a discretionary trust?

Answer 4

Excess income over standard rate band taxed at ART (45%/39.35%)
If income accumulated, forms part of tax pool
If income distributed, it is paid net with an ART (45%) tax credit, regardless of income type

Question 5

How is the annual exemption utilised across multiple IiP/discretionary trusts?

Answer 5

£6150 split between all trusts set up by settlor

Question 6

How is holdover relief applied to IiP/discretionary trusts?

Answer 6

Settlor transfers assets to trust
Holdover relief jointly claimed
When trustees dispose of asset, chargeable gain calculated on overall gain from settlor’s original purchase

Question 7

How are transfers into the following trusts treated:
Bare/disabled
Interest-in-Possession
Discretionary

Answer 7

Bare/disabled - PET
Discretionary/IiP - CLT

Question 8

What rate of IHT will be paid on CLTs?

Answer 8

20% if trustees pay or 25% if settlor pays

Question 9

What other charges are potentially applicable to IiP/discretionary trusts?

Answer 9

Periodic charge of 6% of value over NRB every 10 years
Exit charge linked to periodic charge and number of quarter years since it was last paid

Question 10

Explain how a loan trust works.

Answer 10

Money is loaned to the trust
Loan remains part of settlor’s estate but any growth is outside of estate
Loan doesn’t count as a PET/CLT
Loan repayments can be made using the 5% rule for investment bonds

Question 11

Explain how a discounted gift trust works.

Answer 11

Property transferred to trust but at a discounted value
Settlor receives regular payments from the trust
Initial discount based on settlor’s life expectancy and income requirements
Just the discounted amount counts as a PET/CLT and subject to 7-year clock

Question 12

What is the order of those charged the tax liability for chargeable events in an IiP/discretionary trust?

Answer 12

Settlor - if alive & UK resident
Trustees - if UK resident
Beneficiary - if UK resident