Trusts Flashcards
Three trusts that can only be setup by a Will or through intestacy
Bereaved minors trust
18 to 25 Trust
Immediate post death interest trust
The trustee act 1925 allows a new trustee to be appointed when an existing trustee:
- is dead
- remains outside of the uk for more than one year
- wishes to step down
- refuses to act
- is unfit or incapable of acting
- is an infant
Relevant property trusts
Discretionary trust
IIP trusts set up after 22 March 2006
IIP trusts where there’s been a change in beneficiary since oct 5 2008
Non relevant property trusts
IIP trusts set up before March 22 2006 , no change in beneficiary since oct 5 2008
Bare trusts
Trusts for the disabled
Immediate post death interests
Trusts for bereaved minors
Excluded property trust
Suitable for individuals resident in uk but NOT domiciled
Type of discretionary trust
If they become domicile in the UK asset in the trust remain outside estate for IHT
No chargeable life time transfer when non domicile
Can be domicile in uk after setting up trust
Bond intro trust
Taxable on settlor, or then trustee or then beneficiary when taking money out
20% deemed paid, first 1000@0%
Remaining % is 25%
Trustees assign to beneficiaries, not chargeable event. Payable by beneficiary.
CGT for IIP / DT
50% of annual exemption available (£6150) - if more than one trust is split to minimum £1,230
Rate always 20% and 28% for property
Holdover relief can be claimed
Income tax IIP trusts
Trust has no personal allowance, PSA or dividend allowance
All income taxed at BASIC RATE 20% or 8.75%
Trustees must pay tax if interest and dividends paid to them as paid gross
Income tax IIP beneficiary
Income treated same as normal income, they can use their own allowances
Trust management expenses IIP
Taken off after tax
Grossed up for IIP
Income taxation of discretionary/accumulation trust
First 1000 taxed at 8.75% or 20%
Split to minimum of £200 if more than one trust
Rest of income at 39.35% dividend and 45% all other income
Discretionary trust income paid out
All distributed Income paid out must be paid with tax credit 45%. So beneficiary receives 55%.
Beneficiary trust income received Classed as non savings income
Trust management expenses discretionary trusts
Gross up TME
Take it off total income then tax after. Reduces tax bill.
Discretionary trust income to beneficiaries
Every payment with 45% tax credit
Treated as non savings income for beneficiary
Cannot use PSA or dividend allowance
Trust registration service
Register of the beneficial ownership of trusts
Set up in 2017 requiring trustees to register if trust was liable to paying different types of tax
Requires majority of uk resident non taxable trusts to be registered
18-25 trust
Set up on death of parent/step parent
Start as non relevant property and becomes relevant property
Trustees can pas property between 18&25
No initial charge
No periodic charge as maximum life of trust is seven years
Benefits of a professional trustee
They are set up as a business. Trustee department of bank cannot die.
Professionals bring expertise to the role
They charge for their services so May be unsuitable for small trust
May be slower to make decisions
Four key duties of trustees
To observe the terms of the trust
To act impartially between the different beneficiaries
To provide information to the beneficiaries including accounts
To advertise reasonable care and ensure correct distribution of assets
For trustees to do they duties they should:
Hold title documents to any trust property
Ensure they are registered as the legal owners of the property
Must act in the best interests of the beneficiaries
Exercise care in the management of the trust
Invest any cash that comes into the trust unless its to be paid out to a beneficiary
Keep proper accounts of trust property
Invest the trust property and monitor the investments regularly
Powers of trustees
Buy & sell investments and give receipt for property passed to them
• Insure property
• Settle debts or renegotiate their liabilities
• Maintain minors by advancing money for their maintenance, education or benefit
• Advance capital to a beneficiary.
• To lend funds to beneficiaries
To delegate certain matters to an agent or beneficiary
When can beneficiaries take action against trustees
• Failure to pay beneficiaries their appropriate entitlement
• Use of unauthorised investments
• Using assets for the trustees’ personal benefit
• Not keeping proper accounts
• Trustees didn’t take professional advice
• Trustees haven’t taken account of recent economic, legal or taxation changes
What form do trustees prepare for source of income and gross income
HMRC Form R185
Tax on income distributed to beneficiaries from discretionary trust
If paid to beneficiaries, must be paid with tax credit of 45% regardless of its source
Trust income received by discretionary trust to beneficiary when calculating income
Figure must be grossed up then added to income. Then if there is tax credit deduct from tax bill.
Order of priority for payment of chargeable event discretionary trust
The settlor
Uk resident trustees
Beneficiary
Who is a vulnerable person
A bereaved minor, that’s a child under 18 who has been predeceased by a parent
A disabled person
Making a vulnerable person election
Trustees must complete form VPE1 and send to HMRC
must be signed by both trustees and beneficiary
The decision is irrevocable
When beneficiary of a relevant property trust dies, what happens to their estate?
It is NOT included in their estate, instead it is subject to periodic/exit charges
Exit charge calculation in first 10 years
Deduct the NRB at date of payment from initial value of trust
Charge excess at 20%
Divide this notional tax by the initial value of the trust to get percentage
IHT treatment of accumulation and maintenance trusts
Main use was to assist grandparents make lifetime gifts into trust for benefit of grandchildren
They had options untill 6 April 2008 to
Do nothing which meant became relearn property trust
Trustees could amend trust so that beneficiaries had absolute entitlement at age 18
Trust could be amended so beneficiaries became absolutely entitled at age 25
To qualify as an offshore trust?
All trustees must be non UK resident
Loan trust
Settlor lends money interest free to trust on condition its repayable on demand
Trustees usually invest in a bond and repay the settlor 5% or investment each year
It is a loan rather than a gift, outstanding loan is included in deceased estate.
Any growth is outside of the estate and available to beneficiaries
Discounted gift trust
Allows settlor to place lump sum into trust while retaining right to regular payment
Usually placed into a bond in a discretionary or absolute trust
Amount that is treated as a transfer for IHT is the gift less the retained amount
Risk is that there is no guarantee of income that lasts a lifetime so depends on growth of investment
Flexible reversionary trust
Enables settlor to make a gift that is effective for IHT and can benefit from the trust
The gift is a CLT
Trustees invest this in a series of single premium endowments
As each matures trustees can claim proceeds or extend policy
If claimed they are paid to settlor
Accumulation and maintenance trust
Type of discretionary trust where one or more beneficiaries legally entitled to capital/income from age no later than 25
Until then income is held for maintenance/education/benefit of the beneficiaries
Trust must be no longer than 25 years
Lump sum IHT trust plans
Loan trust
Discounted gift trust
Flexible reversionary trust
Loan trust
Settlor sets up trust
Makes an interest free loan/repayable on demand
Trustees invest in an investment bond
Growth on bond outside settlor’s estate
Trustees use 5% withdrawals to repay loan to settlor
Settlor only entitled to return of loan
Settlor must spend loan repayments
Discounted gift trust
Settlor makes a gift to a trust
PET if bare trust used/CLT if discretionary trust
Settlor retains the right to fixed capital sums
Gift is discounted for the purposes of IHT transfer
Settlor’s retained rights have no value on death
Discount only relevant if settlor dies within 7 years
Settlor makes a gift for IHT purposes but retains a right to income
Not a GWR and POAT does not apply
Relatively inflexible
Back to backs
Individual buys an annuity on their own life
Takes out a life policy on their own life under trust
On death annuity has no value and the life policy is outside the estate for IH
For those in good health that have assets that can’t be gifted such as a house
Can be single or joint life basis
Life policy must be underwritten
Capital content of annuity is tax free interest element is taxable
Trust is usually discretionary
Trust review may be triggered by
Death of trustee/beneficiary
Serious illness of trustee/beneficiary
Bankruptcy of settlor, trustee or beneficiary
Beneficiary’s marriage/separation/divorce
Changes in income/wealth
Disputes between settlor/trustee/beneficiary
Discretionary trust starting rate and rules
£1000 starting rate at 8.75/20%, reduced to £200 minimum if multiple trusts
