Trusts: Income Tax and Capital Gains Tax

Question 1

When must the trustees inform HMRC about their trust when it is created - what are the 2 reasons?

Answer 1

• When at least one trustee is resident in the UK

* When there is a possibility of future income and gains

Question 2

What are the reponsibililties of a trustee? (5)

Answer 2

• Notify HMRC when trust is created if one trustee is UK resident and if there are future income and gains
• If trust is settled is this during lifetime or death
• Give details of the assets within the trust
• Keep a record of all the transactions of the trust and the associated tax
• Complete a trust and estate self assessment return each year (not if a bare/absolute)

Question 3

How are trust expenses set against income?

Answer 3

1. Dividend income
2. Savings income
3. Other income

Question 4

When is the deadline for the self assessment returns for the trust?

Answer 4

Exactly the same as a normal assessment - return must be filed if online by 31st Jan on the following tax year and then payments on accounts must be paid

Question 5

When is the payment required for CGT on a trust?

Answer 5

By lump sum on 31st January after the end of the tax year it fell in

Question 6

Who would be liable to pay any late payment of the submission of the tax return for a trust?

Answer 6

The trustees would be jointly and individually liable to pay the fine

Question 7

What does the form R185 do within the trust?

Answer 7

If trustees make a payment from the trust then they must complete form R185 as this confirms the income tax that has been deducted from the payment. The person receiving the payments then uses this form if a claim for a repayment of tax is made

Question 8

Explain the income tax treatment of a bare trust?

Answer 8

*The beneficiary is normally liable for income tax on income received by the trust and can use full PA ( provided that there income is not over £100000)
*It is as though the beneficiary has received the income directly
*Although the liability falls on the beneficiary, the tax may be paid by the trustees ( from the trust fund) on behalf of the beneficiary
*Where any interest is received net of 20% ( eg from corporate bonds, fixed interest trusts/OEICS) then the tax can be reclaimed if the beneficiary is a non tax payer or it falls within the PSA
*The beneficiary must declare this trust income on their own tax return
NB: remember the rule however with children and if the parent has set up this bare trust and the income is less than £100, then this is taxed on the child - over £100 and this is taxed on the parent

Question 9

How is a trust for a vulnerable person set up?

Answer 9

The trustees must complete an election form and this must be signed by both the trustees and the beneficiaries.
Once made this election is irrevocable

Question 10

What is the key thing that has to happen if the trust is to be split between a vulnerable beneficiary and a non- vulnerable beneficiary?

Answer 10

*The assets need to be identified and kept separate
* The assets for the vulnerable party can only be used for them
The assets for the vulnerable will receive the special tax treatment

Question 11

How are interest in possession trusts taxed for income? 6 points

Answer 11

• Trustees are liable for income at the basic rate ie 7.5% on dividends and 20% on non-dividend income
• There is no starting rate band
• No personal allowance
• The income (net of expenses) is then paid to the income beneficiary who will be assessed for income tax and they can use their own personal allowance
• If they are a basic rate tax payer then they have no further liability to tax
• Higher rate and additional rate will have further liability to pay
• Non tax payers can then claim this back

Question 12

When would be the only time that the interest in possession trust income tax is not taxed on the income beneficiary?

Answer 12

If this were the parents setting up a interest in possession trust for their children and the income received was over £100 - this would be taxed on the parent

Question 13

Who is liable to pay the income tax on a flexible interest in possession trust where the settlor is a potential beneficiary?

Answer 13

The settlor

Question 14

How are discretionary trusts taxed in respect of income tax? - 7 points

Answer 14

• There are no personal allowances for the trustees
• There is a standard rate band of £1000 which is subject to basic rate tax ie 20% on non-dividend and 7.5% on dividends
• No starting rate of tax available
• If more than 1 trust then this will be divided between this number to a maximum of 5 - it will never fall below £200
• Standard rate band applies first to non-dividend income then to dividends
• Any income over the band is then taxed at ‘trust rates’ which is the same as an additional rate tax payer which is 38.1% on dividends and 45% on non dividends
• Tax paid at source will be deduced

Question 15

If income under a discretionary trust is paid out to a beneficiary then how is this taxed?

Answer 15

• It carried a 45% tax credit - regardless of its source of income
• The beneficiary if not an additional tax payer can reclaim some of this tax paid: - if non, reclaim 45%, basic 25% and higher 5%
• They can use their personal allowance

Question 16

How are the gains dealt with under a bare trust?

Answer 16

• Beneficiaries are liable for the gains ( even if created by parents)
• Each has their annual exemption
• Treated as though the beneficiary has made the gan personally
• Beneficiary is liable however the trust may pay the tax from the trust fund on behalf of the beneficiary

Question 17

How are the CGT dealt with under a trust for a vulnerable beneficiary?

Answer 17

• Trustees are liable for any gains within the trust fund
• Tax may be calculated as though the beneficiary has made the gains personally
• Beneficiary has full exemption
• a. calculate the tax on trust and then calculate tax payable if gain made directly on beneficiary and then deduct the difference

Question 18

Explain how CGT is applied within a interest in possession trust/discretionary trust/accumulation trust?

Answer 18

• Trust has half the annual CGT allowance
• If the settlor has more than 1 trust then this is split ( but never goes below £1100
• Any gains above the annual exemption are paid at 20% (28% if property related)
• holdover relief can be claimed so that no CGT is payable at that time - both settlor and trustees must make this jointly
• Holdover relief is not available however where the settlor has an interest ( or may have an interest later)

Question 19

Are any CGT payable on a transfer to a charitable trust?

Answer 19

No

Question 20

What must you be aware of is the trust disposes of gilts or qualifying corporate bonds?

Answer 20

There would be no CGT payable on either of these as these investments are exempt