7 - Taxation of Trusts Flashcards
(33 cards)
Trust Taxation
How is trust taxation assessed, administered and paid?
Trust taxation uses self assessment, same as an individuals self assessment.
Two interim payments in 31 Jan and 31 July, balancing payment in 31 Jan after tax year end which includes CGT.
Trust Taxation
Who has liability for the trust tax?
Trustees are joint and severally liable.
Trust Taxation
What are the consequences for trustees if trust income tax isn’t paid?
- They are personally liable;
- It can be collected from them personally by HMRC;
- HMRC can impose penalties for late and non-payment;
- Trustees are personally liable for any penalties incurred while they are trustees.
Trust Taxation
Is the creation of a trust considered a transfer of value?
Yes, value is transferred from the settlor to the trust.
What are the main types of trust for tax purposes?
- Bare trusts - Where the beneficiary is absolutely entitled to the assets, or would be if they were over 18.
- Interest in Possession trusts (IIP) - Where one or more beneficiaries have a right to income.
- Discretionary trusts - Where no beneficiary has immediate access to income.
Trust Taxation - IHT
What is the IHT charge on transfer into the trust?
- Bare trust - PET.
- IIP trust - CLT; although pre 2006 this was a PET.
- Discretionary trust - CLT.
Trust Taxation - IHT
Are the trust assets within the beneficiaries estate?
- Bare trusts - Yes;
- IIP trusts - Pre-2006 the IIP was in their estate upon death, post-2006 it doesn’t enter their estate;
- Discretionary trusts - No.
Trust Taxation - IHT
Which trusts are subject to annual charges?
Details of the charge
- Bare trust - No annual charge;
- IIP trust - Post 2006 they are subject to the charge;
- Discretionary trust - Yes.
Annual charge is up to 6% every 10 years
Trust Taxation - IHT
When are capital exit tax charges made?
Discretionary trusts may have a capital exit charge of up to 6% of the excess above NRB.
The charge is basically a catch-up of the 10 yearly charge.
Count the number of quarters since the last anniversary (or settlement date if it’s under 10 years) and divide by 40. Multiply that by 6% and apply to excess over NRB.
NOTE: In exam the 6% is defined as 30% of the lifetime rate (i.e. the 20% CLT rate).
Trust Taxation - Income Tax
How are bare trusts treated for income tax?`
Essentially the income is considered beneficiaries income, so they pay personal tax on all of it.
Trust Taxation - Income Tax
How is IIP trust income taxed?
Trustees are liable for basic rate tax on all earnings (no allowances or bands).
So 7.5% on divs, 20% on other income.
If the settlor has an interest they are taxed personally, and can re-claim tax paid by the trustees.
Trust Taxation - Income Tax
How are discretionary trusts treated for income tax?
Trustees pay the tax, rates are shown in tables.
They have a standard rate band of £1k split across all trusts the settlor has made (minimum £200 per trust).
That amount is taxed at basic rate (7.5% divs, 20% other).
The rest is taxed at 38.1% divs, 45% other.
Any distributions receive a 45% tax credit, regardless of how it was originally taxed. So if the beneficiary pays tax below the 45% rate they can claim the excess back.
Trust Income Tax
Are trustee expenses allowable for income tax relief (IIP or discretionary)?
- IIP trusts: Expenses are not allowable for trustee tax, but are allowable for the income tax calculation on the beneficiary. Expenses need to be grossed up and deducted from trust income in the stated order (see slide).
- Disc. trusts: Expenses are allowable for trustee tax, but need to be grossed up by the appropriate basic rate (20%, 7.5%) before being deducted. Relieve in the stated order (see slide).
Trust Income Tax
What is the order in which types of income are relieved against trustee expenses (where appropriate)?
- UK dividends;
- Foreign dividends;
- Savings;
- Other Income.
Trust Taxation - CGT
Treatment of bare trusts
CGT charged on the beneficiary, so full annual allowance available.
Trust Taxation - CGT
How are IIP trusts treated for CGT?
Trustees charged 20% (28% for resi.).
Get half of the usual annual allowance, divided by the number of settlors trusts (max 1/5th).
If the settlor has an interest it is taxed on the settlor who can reclaim from the trustees.
Holdover relief is available on disposal to a beneficiary.
Trust Taxation - CGT
What holdover relief is available?
- Bare trusts - Business assets only;
- IIP - Pre 2006 was business assets only, post 2006 is all assets (unless settlor is interested then no holdover relief);
- Discretionary trust - Holdover relief on any asset (unless settlor interested).
Trust Taxation - CGT
How are discretionary trusts treated for CGT?
20% (or 28% for resi) with half the annual allowance, divided by number of settlors trusts (max 5).
Unlike IIP trusts gains are not assessed on the settlor where they are a beneficiary.
Trust Taxation - CGT
Other than when trustees sell assets within the trust (eg for re-balancing portfolio), when might CGT be payable?
How is CGT calculated?
When a beneficiary becomes absolutely entitled to their share of trust capital.
This is treated like a change in ownership (kind of like changing to a bare trust) so is a sale for CGT purposes, at the market value when they become entitled.
CGT paid by trustees based on trustee rules, deducting the value when assets were transferred into the trust and any costs incurred.
Trust Taxation - Beneficiaries
How are beneficiaries of an IIP trust taxed (income)?
Relevant form?
Alternative approach?
Trustees complete R185 form showing net of tax figures.
Beneficiary is then taxed personally and can re-claim tax paid by the trust (can get a credit or have more tax to pay).
Income is treated as savings/dividends income rather than trust income so they can use their personal savings allowance or dividend allowance.
Sometimes income can be paid directly to the beneficiary instead of the trust, in which case the beneficiary is simply assessed as an individual.
Trust Taxation - Beneficiaries
How are beneficiaries of discretionary trusts taxed?
Trust deemed to have paid 45% tax on all income, so they can re-claim based on their own tax rate (up to 45% if non-tax-payer, 25% if standard rate, 5% if higher rate, 0 if additional rate).
Beneficiaries income is “trust income” not dividends or savings, so can’t use savings allowance or divs allowance, taxed like salary or pensions.
Note that the trustees may have originally paid less than 45% tax (due to basic rate allowance, or lower tax rate on dividends). They will have to make up the difference to 45% with HMRC, otherwise the tax credit to the beneficiary is too high.
Definition of a vulnerable person
- Disabled person: Mental disorder or receiving disability allowance at middle or higher rate; or
- Relevant minor: Under 18 and at least one parent died.
How is a vulnerable persons trust created?
The trustees must make a joint election to get the favourable tax treatment.
It must be made within 12 months of the 31 Jan after the end of the tax year.
It is irrevocable once made.
Tax treatment of vulnerable persons trusts
Income tax and CGT get special relief. Calculate the tax due from trustees in normal case and tax due if the beneficiary got the income/gain themselves. The difference is allowable as a relief.
Gifts into a vulnerable trust are PETs and they are exempt from 10 yearly tax charges.
