Trusts

Question 1

Three trusts that can only be setup by a Will or through intestacy

Answer 1

Bereaved minors trust

18 to 25 Trust

Immediate post death interest trust

Question 2

The trustee act 1925 allows a new trustee to be appointed when an existing trustee:

Answer 2

• 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

Question 3

Relevant property trusts

Answer 3

Discretionary trust
IIP trusts set up after 22 March 2006
IIP trusts where there’s been a change in beneficiary since oct 5 2008

Question 4

Non relevant property trusts

Answer 4

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

Question 5

Excluded property trust

Answer 5

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

Question 6

Bond intro trust

Answer 6

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.

Question 7

CGT for IIP / DT

Answer 7

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

Question 8

Income tax IIP trusts

Answer 8

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

Question 9

Income tax IIP beneficiary

Answer 9

Income treated same as normal income, they can use their own allowances

Question 10

Trust management expenses IIP

Answer 10

Taken off after tax

Grossed up for IIP

Question 11

Income taxation of discretionary/accumulation trust

Answer 11

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

Question 12

Discretionary trust income paid out

Answer 12

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

Question 13

Trust management expenses discretionary trusts

Answer 13

Gross up TME
Take it off total income then tax after. Reduces tax bill.

Question 14

Discretionary trust income to beneficiaries

Answer 14

Every payment with 45% tax credit
Treated as non savings income for beneficiary
Cannot use PSA or dividend allowance

Question 15

Trust registration service

Answer 15

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

Question 16

18-25 trust

Answer 16

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

Question 17

Benefits of a professional trustee

Answer 17

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

Question 18

Four key duties of trustees

Answer 18

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

Question 19

For trustees to do they duties they should:

Answer 19

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

Question 20

Powers of trustees

Answer 20

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

Question 21

When can beneficiaries take action against trustees

Answer 21

• 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

Question 22

What form do trustees prepare for source of income and gross income

Answer 22

HMRC Form R185

Question 23

Tax on income distributed to beneficiaries from discretionary trust

Answer 23

If paid to beneficiaries, must be paid with tax credit of 45% regardless of its source

Question 24

Trust income received by discretionary trust to beneficiary when calculating income

Answer 24

Figure must be grossed up then added to income. Then if there is tax credit deduct from tax bill.

Question 25

Order of priority for payment of chargeable event discretionary trust

Answer 25

The settlor
Uk resident trustees
Beneficiary

Question 26

Who is a vulnerable person

Answer 26

A bereaved minor, that’s a child under 18 who has been predeceased by a parent
A disabled person

Question 27

Making a vulnerable person election

Answer 27

Trustees must complete form VPE1 and send to HMRC

must be signed by both trustees and beneficiary

The decision is irrevocable

Question 28

When beneficiary of a relevant property trust dies, what happens to their estate?

Answer 28

It is NOT included in their estate, instead it is subject to periodic/exit charges

Question 29

Exit charge calculation in first 10 years

Answer 29

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

Question 30

IHT treatment of accumulation and maintenance trusts

Answer 30

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

Question 31

To qualify as an offshore trust?

Answer 31

All trustees must be non UK resident

Question 32

Loan trust

Answer 32

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

Question 33

Discounted gift trust

Answer 33

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

Question 34

Flexible reversionary trust

Answer 34

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

Question 35

Accumulation and maintenance trust

Answer 35

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

Question 36

Lump sum IHT trust plans

Answer 36

Loan trust

Discounted gift trust

Flexible reversionary trust

Question 37

Loan trust

Answer 37

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

Question 38

Discounted gift trust

Answer 38

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

Question 39

Back to backs

Answer 39

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

Question 40

Trust review may be triggered by

Answer 40

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

Question 41

Discretionary trust starting rate and rules

Answer 41

£1000 starting rate at 8.75/20%, reduced to £200 minimum if multiple trusts