9 - Trust and Tax Planning Flashcards
If making lifetime gifts should you try to make CLTs or PETs first?
- Annual allowances used in chronological basis, so potentially wasted if you make a PET before a CLT in a given year;
- Making a PET before a CLT could increase periodic/exit charges within the trust if the PET later becomes chargeable;
- On the other hand a CLT made before a PET might end up reducing the NRB available for the PET if the donor dies within 7 years.
Loan Trust
What is a loan trust?
This is when the settlor makes a loan to a discretionary trust rather than gifting, thus avoiding IHT.
Up to 5% can be re-paid each year, which re-enters the estate, and the trust must retain enough capital to repay the whole loan eventually. If the loan is ever written off this would be considered a gift (CLT).
The growth in the bond is due to the beneficiaries and no IHT will be due.
There is no GWR or POAT as nothing was given away and annual charges only on the excess value after deducing the loan balance outstanding.
Discounted Gift Trust
What is a discounted gift trust?
Settlor gifts cash or an investment bond into a trust but retains a fixed income for the rest of their life from the capital. The fixed nature of the income makes it highly inflexible, no capital can be distributed to other beneficiaries until the settlor is dead.
IHT value is discounted based on the residual value. Discount is only valuable if you die within 7 years (although initial CLT may be reduced if it’s a discretionary trust).
If the settlor waives their income rights it will be considered a gift for IHT purposes.
GWR and POAT do not apply.
What is a retained interest trust?
This is a split investment bond where a fixed percentage of the value is retained by the settlor and the remainder goes to a discretionary or IIP trust.
The trustees can withdraw up to 5% per year which can be paid to the settlor, which pays off the settlors share of the bond. This doesn’t trigger POAT rules.
There will be an initial CLT on the portion of the bond allocated to the trust.
What is a will trust scheme?
This was more popular before the ability to transfer NRBs was introduced.
A married person arranges for a certain amount of their estate (up to the NRB) to go into a discretionary trust for the benefit of their spouse.
The trust must make provision for the trustees to provide loans to the surviving spouse, who can spend the amounts as income and generate a liability in their estate. This reduces their estate by the amount of the trust property, effectively allowing them to utilise the NRB of their deceased spouse.
Flexible Reversionary Trusts
What are they?
What type of trust?
Settlor makes a cash gift which is invested in surrenderable endowment policies with maturity dates spread over (usually) 10 years. These maturity dates can be extended by trustees without being considered additional gifts.
Either gifted to a bare trust which pays out to a discretionary trust (double FRT) or gifted into a discretionary turst (single FRT).
There’s no discounting, pay full CLT on gift if above NRB and within estate if you die within 7 years.
However you can receive income without GWR or POAT.
Payments can be made to beneficiaries at any time (even while settlor is alive), either surrender policies and pay cash or assign policies to beneficiaries (so they would be taxed at the beneficiaries rates).
Back to Back Trust
What are they?
The settlor buys an annuity and uses the annuity income to pay premiums on a life assurance policy in trust.
So they effectively guarantee a payment in trust to beneficiaries when they die, but without making a gift - the life assurance premiums likely fall within annual IHT exemptions.
HMRC requires the two contracts to be unconnected to let you get away with this, which in practice means do them with different life offices.
Only the interest element of the annuity is taxable.
Reviewing Trusts
Requirements to review trusts
Requirements of a review
Trustees have a legal obligation to review the trusts regularly.
In addition a review may be triggered by certain events.
- Reviews should be structured;
- Issues should be identified and dealt with;
- Areas uncovered vary depending on the type of trust and reason for the review;
- A checklist of questions should be used.
Reviewing Trusts
Events that trigger a review
- Death of trustee or beneficiary;
- Serious illness of trustee or beneficiary;
- Bankruptcy of settlor, trustee or beneficiary;
- Beneficiaries marriage, seperation or divorce;
- Changes in income or wealth;
- Disputes between any parties.
Reviewing Trusts
Checklist for a review
Circumstances
- Any deaths, illnesses, bankruptcies;
- Do any beneficiaries have special needs;
- Are the present trustees still appropriate;
- Any changes to beneficiaries since last review;
External Changes
- Any changes to tax rules;
- Any economic changes since last review;
- Any relevant changes to laws;
- Are the terms of the trust still valid;
Administration
- Are all trust investments in the name of the trustees;
Periodic Checks
- Are all trust investments still appropriate;
- Any distributions of capital or income appropriate;
- Any periodic or exit charges due.
What type of trust should you set up in your will to pass assets to minors?
A bereaved minors trust (they inherit at age 18) or an 18-25 trust (you can set it up so they inherit at age 21 for example).
It’s essentially the same as passing the assets into a discretionary trust, however there is no 10 yearly or exit charge up to age 18.
For 18-25 trusts an exit charge is due, growing from 0% at age 18 to 6% at age 25, on the excess over NRB.
So effectively it’s just a discretionary trust with a free period while the beneficiaries are under age 18.
What type of trust needs to be used to pass on residential property but allow somebody else to live in it in the meantime?
Can PPR relief still be used?
This would be an IIP trust. The person who needs to live in the property (eg spouse) retains the life interest in the property, so they can live there (or rent it and receive the income).
The remaindermen will eventually be due capital once the life interest has died.
PPR can be claimed if the life interest uses it as their principal private residence.
