Trusts - Tax Treatment Flashcards
What is tax treatment of Bare / Absolute Trust
Taxed as income of beneficiary
Beneficiary has available their allowanced - personal, personal savings allowance & dividend allowance
If income if from parents assets then any income over £100 is taxed on the parent
What is tax position of Discretionary Trust for both trustees and beneficiaries
Trustees
basic rate band of £1000 at brt
Above this
Interest income taxed at 45%
Dividends taxed at 38.1%
Beneficiaries
Taxed at marginal rates
Can reclaim tax paid by trustees depending on own tax status
If reclaim is greater than tax already paid by Trustees then the Trustees need to make a further tax payment
(e.g. dividend deducted at 38.1% but non-taxpayer reclaims at 45%)
How is tax relief given on contributions into a personal pension scheme
Paid from net earnings - after tax and national insurance have bern deducted.
Known as Relief at Source method
Pension provider will claim basic tax relief from HMRC on the grossed up contribution
Contributors basic rate tax band will be increased by the amount of the grossed up contribution
How is tax relief given on employers contribution to an occupational pension scheme?
Contributions will be deducted from Gross Pay
So no need to claim tax relief
How can a qualifying interest payment be deducted from income
Certain interest payments can be deducted from income
A loan taken out to pay IHT qualifies (although relief is restricted to a period of 1 year from making the loan)
Deduction is limited to higher of 25% of adjusted total income or £50,000
Adjusted total income = total income (including taxable benefits) plus charitable donations made via payroll , less any pension contributions, less gift aid contributions.
Before making a Bankruptcy Order
Petition presented (Insolvency Act 1986)
Creditor/Creditors owed jointly £5000 unsecured debt
Must prove inability to pay
* Debtor not complied within 3 weeks of statutory demand
* Bailiff’s unable to collect
Debtor can petition themselves to stop creditors harassing them
* Must be unable to pay
If debtor disposes of any assets after petition presented, transaction can be voided if bankruptcy goes ahead
Petition now made online
* No need to go to Court
* Adjudicator decides to make bankruptcy order or not
What happens after Bankruptcy Order
Official Receiver takes control of debtors assets
* Debtor submits statement of affairs
* OR decides whether to call creditors meeting to enable creditors to introduce insolvency practitioner as Trustee in Bankruptcy (TIB)
What is the tax treatment for Trustees & Beneficiaries of an Income in possession trust?
Trustees pay basic rate tax on all income received into the trust
- 20% on interest income
- 7.5% on Dividend Income
Trustees do not get a personal allowance
Beneficiary
Income is received with a basic rate tax credit
Interest:
* Eligible for PSA
* HRT will need to pay additional 20% on interest (ART 25%)
Dividend
- Can use £2000 Dividend Allowance
- she would need to pay an additional 25% above this (32.5% - 7.5%)
What is the tax position of Life Tenant of an Interest in Possession Trust on death of Life Tenant
CGT
No CGT liability
Base cost of assets will be reset to the market value
On the date of death
If Trustees sell assets following death
This would be subject to CGT
If the gain exceeds trustee annual exempt amount.
IHT
The value of the trust will form part of deceased (life tenant) estate
When added to other assets any amount in excess of her allowances would be subject to IHT
This will be payable by the trustees
What might prompt a review of a trust following a life tenants death?
Is there a need to wind up the trust & distribute assets to beneficiaries in full
The objectives of the trust - income and capital needs of remaindermen
Are the investments aporopriate
Timescale before large capital distributions are made / age of the remaindermen
Risk profile / Capacity for loss of the beneficiaries
What are the investment duties of Trustees
- Obtain and consider proper advice
- Duty of care to act appropriately / invest assets as if they are his own / acting of best interest of beneficiaries
- Monitor investments / regularly review
- Take note of standard investment criteria
- Consider suitability of investments / attitude to risk
- Need for Diversification
- Make changes to investments if appropriate / rebalancing
Calculate Periodic charge on 10th Anniversary
Then at date of exit
Trust value - NRB
Result x (30% x 20%) - 6%
Calculate effective rate of tax
Tax / Total Value
Multiply amount by effective tax rate
Exit charge
Amount at Exit x (number of complete quarters / 40) x effective charge
What are relevant factors which could cause a Trustee to to review investment policy of a trust
- Commencement of University fees or living cost (e.g. from case study)
- Death or Illness of Beneficiary
- Change of circumstances (e.g. marriage
- Economic or legislative changes
- change in tax position of beneficiary / suitability / Attitude to risk
What is the CGT tax treatment for an Income in possession trust
Treated as additional rate taxpayers for CGT.
For residential property - if PPR did not apply they would be charged 28%
Who claims Holdover Relief for CGT when a gift is made into a discretionary trust
Only the Donor needs to apply
