Trusts Flashcards
What are the two types of trusts?
Absolute/bare
Flexible/discretionary
Describe an absolute/bare trust
Property is held absolutely with no flexibility.
Must be given to beneficiary if requested over the age of 18
What is a concern of bare trusts?
If a beneficiary falls in with a bad crowd, trustees may have to go to court to prevent the trust from falling into the hands of someone who may use it to fuel a drug habit.
What is a discretionary/flexible trust?
A trust where the trustees have a say as to who benefits and when.
Beneficiaries will be in classes, and the trustees choose from these classes.
Classes can be narrow or broad
Describe the types of discretionary/flexible trusts?
Discretionary trust- trustees decide on appointment of both income and capital from classes.
Interest in possession - settlers select default beneficiaries at the start. Trustees can make decisions to change them.
What is the most popular flexible trust?
Discretionary because they are more flexible.
Both are now chargeable lifetime transfers.
What trusts are PETs, and what are CLTs
Bare/absolute-PET as beneficiaries’ estate increases
Discretionary/ flexible CLT can not be considered part of beneficiaries’ estate as can be changed whilst in trustees’ hands.
Taxation of income in a bare trust
Tax is transparent.
Income passed on to the beneficiary and will be taxed at their rate.
They may use their personal allowance.
Exceptions for parental settlements
Taxation of capital gains in a bare trust
Tax on gain liable to the beneficiary under normal individual principles.
Taxation of IHT in a bare trust
Counts as PET
If fails, take first call on nill rate band.
Taxation of income in a discretionary trusts
Basic rate band £1000 taxed 20% for interest and 8.75% for divs.
No div allowance or personal savings.
Band divided between multiple trusts minimum £200.
Above the band is treated as additional rate (45% income 39.35% divs)
Taxation of capital gains in a discretionary trust
Treated as additional rate
Can benefit from half the standard CGT allowance split between trusts subject to a minimum 1/10 standard rate.
Tax 20% or 28% for property
How is the extra tax charge levied against the discretionary trust?
6% every 10 years above the nil rate band.
One trust would get the full band.
Subsequent bands would have the band reduced by the amount originally invested into the first trust.
What might happen to stop trustees from distributing the trust before the 10th anniversary and avoiding the charge?
An exit charge up to 6%
Set by reference to the tax paid at outset or at the most recent 10th anniversary.
Proportionally based on how long has elapsed since the start or the last 10 year point using time period of 3 months.
Taxation of income on an interest in possession trust pre and post 2006
Basic rate 20% income 8.75% div
No div or personal savings allowance
The beneficiary may reclaim this if non-taxpayer or pay more if higher or additional
