AF1 Personal Tax and Trust Planning

Question 1

Agricultural property relief (APR)
Relief for property in the UK, Channel Islands, Isle of Man or EEA, available on lifetime transfers or death.
•Agricultural property includes land, growing crops and farm buildings, but not the animals or equipment.
•The relief is given on the agricultural value of the land but not any development value. Agricultural property does not include buildings on their own.
•Relief is not given on any excess of the open market value of a farmhouse over its agricultural value.
•Where both agricultural and business relief available, agricultural relief is given first.

Answer 1

• Relief may be denied entirely if the occupier of the farmhouse is not involved in farming the land on a day-to-day basis.
• Relief is 100% for owner-occupied farms and farm tenancies and 50% for the interest of landlords in let farmland.
• Property must have been occupied by the transferor for agricultural purposes for the previous two years, or have been owned by the transferor for seven years and occupied by someone else for agricultural purposes for that time.
• Relief does not apply to property that is subject to a binding contract for sale.

Question 2

Agricultural property relief 2 (APR)
Farm with property development value will qualify for the agricultural property relief on its agricultural value and business property relief may be given on the enhanced value.
Generally, assets in a farming business will qualify for business property relief, even if they do not qualify for agricultural property relief.
•If owner dies within 7 years of making a gift that qualified for relief, there maybe a tax liability - e.g. if land is not still owned by recipient or no longer qualifies as agricultural land.

Answer 2

Woodlands relief
Woodlands relief is a special relief for growing timber in the UK or EEA.
•The relief applies only to the timber and not the land itself, which may, in any case, qualify for agricultural relief.
•Relief applies to transfer on death, not lifetime gifts, and it operates by deferring the tax until disposal of the timber.
•However, the occupation of woodlands for commercial purposes would mean that business property relief could be claimed at 100% which is preferable to deferment.

Question 3

Business property relief (BPR)
Business property relief is a relief for transfer of business property. The property has to be owned for 2 years before the transfer qualifies as business property.

Answer 3

The relief is 100% for:
•Interests in unincorporated businesses (i.e. sole trader)
•Shareholdings of any size in unquoted and AIM companies.

Question 4

Non-qualifying assets
Certain business assets do not qualify for business property relief or may reduce the amount of relief due.
•The relief does not apply to businesses that consist wholly or mainly, of dealing with securities/stocks or shares/land or buildings/or making or holding investments.
•BPR is not available if the property is subject to a binding contract for sale at the time of the transfer. E.g. BPR would not be available on company shares if the personal representatives were obliged to sell, and the remaining shareholders obliged to buy, the shares on the death of their owner, a relatively common situation under share purchase agreements of small companies.

Answer 4

•Certain assets must be disregarded when valuing business property such as shares or an interest in a business:
Any asset that has not been used in the business during the previous two years.
Assets not required for future use in the business at the time of the transfer.
•The purpose of disregarding these assets is to stop BPR being claimed on large amounts of cash or investments that are not genuine business assets.
•In some cases, relief can be given where a large amount of cash is held within a business. It will need to be shown that the cash is required for a specific business purpose; it is not enough to assert that it is needed for some opportunity that might arise in the future.

Question 5

People to whom IHT applies
People domiciled in the UK are liable to IHT on tall their property whether it is situated in the UK or elsewhere.
•If a person is domiciled outside the UK, IHT only applies to property that is situated in the UK.
•Individuals may be deemed to be domiciled in the UK for IHT, even though they are domiciled outside the UK for purposes of general law and other taxes, such as income and capital gains tax (CGT)
•In general, deemed UK domiciled if resident in UK for 17 out of last 20 years. residence is determined according to the usual income tax rules.

Answer 5

Inheritance Tax (IHT)
40% for excess over £325,000
36% for excess over LTA if meeting 10% rule.
In order to qualify for the reduced rate must leave at least 10 per cent of the net value of estate to a qualifying charity.
The net value of estate is the sum of all the assets after deducting any debts, liabilities, relief’s, exemptions and the nil-rate band.
A qualifying charity is an organisation that’s recognised as a charity for tax purposes by HM Revenue & Customs (HMRC)

Question 6

36% IHT Rate
Beneficiaries can make ‘Instrument of Variation’ to make or increase a donation to charity to qualify for 36% rate IHT.

To see how much individual needs to leave to charity to qualify or whether estate can pay a reduced rate of Inheritance Tax because of a charitable donation left in a will, have to work out the value of each of the separate parts of an estate. These are known as ‘components’. It’s possible that one part of estate may pay Inheritance Tax at 36 per cent and another pay tax at the full rate of 40 per cent.

Answer 6

To work out whether the reduced rate applies, estate and assets are broken down into three components as follows:
•assets that owned jointly with someone else that pass by ‘survivorship’
•assets in trust
•assets that owned outright or as tenants in common with someone else

Possible to merge one or more components to gain the maximum benefit from the reduced rate.
‘Gifts with reservation’ may also qualify to pay tax at reduced rate, but only if merged with one or more of the three components of the estate

Question 7

36% IHT Rate 2
Trust and trust assets will fall into the ‘settled property’ component.
If beneficiary of more than one trust and IHT is due on them, donation to charity has to be more than 10% of the total value of all of them in this component to qualify for a reduction in tax.
It’s not possible to vary the destination of trust assets by an Instrument of Variation.

Can claim the reduced rate of Inheritance tax by completing form IHT430 Reduced rate of Inheritance Tax with form IHT400 - Inheritance Tax Account.
Personal Representative may opt out of claiming for reduced rate to make process simpler, as some assets would need to be professionally valued and the cost may outweigh the benefits.

Answer 7

1 - work out which assets fall into each component - remember not all estates have all three components.
2 - add up the assets then deduct any debts, liabilities, relief’s and exemptions that apply to each component.
3 - apportion the IHT nil rate band - including any transferable unused nil rate band from a spouse or civil partner - between the number of components being used and any assets classed as ‘gifts with reservation’.
4 - deduct the apportioned value of the nil rate band from each component.
5 - add back in the value of the donation to charity - this result is the ‘baseline amount’ for each component.
6 - divide the baseline amount by 10.
7 - work out whether the charitable donation is more than the result of the sum at step 6.

Question 8

Income tax
Company car - Capital contributions of up to £5,000 made by employees towards the cost of the car and/or accessories, when the car is first made available, will reduce its list price for tax purposes.
Diesel cars are subject to a 3% supplement.

Answer 8

Pension contributions and Gift Aid (charity contributions) are used to extend the 20%/40% rate when calculating income tax payable.

Excess of £100,000 reduces personal allowance on a 2-1 basis.

Question 9

National insurance contributions
Contracted out defined benefit:
Employees can reclaim 1.6% of the difference between LEL and Primary Threshold.
Employer can reclaim 3.7&% of the difference between LEL and Primary Threshold.

Answer 9

No longer possible for DC schemes to contract out.

Question 10

Intestacy
If there are surviving children, grandchildren or great grandchildren of the person who died and the estate is valued at more than £250,000, the partner will inherit:

• all the personal property and belongings of the person who has died, any joint holdings and
• the first £250,000 of the estate, and
• a life interest in half of the remaining estate. This means that if you are entitled to the life interest, you cannot get rid of or spend that part of the estate. You can, however, have the benefit of it during your lifetime.

Answer 10

• Wills are automatically revoked on marriage.
• There is an exception to the automatic revocation of a Will by marriage or entering into a civil partnership.
• If the Will is re-signed in advance ‘in contemplation’ of the marriage or civil partnership, then it will not be revoked, but it is vital to ensure it is correctly worded.
• Divorce does not completely revoke a Will, but it will mean that a gift left to a former spouse or civil partner in the Will fails. The appointment of a former spouse or civil partner as an Executor is automatically revoked by divorce and so replacement Executors may also be required.

Question 10

Trust Taxation
Bare Trust
Income tax
Beneficiary taxable at own tax rates unless an unmarried minor child of the settlor, in which case the settlor is liable where income exceeds £100 per annum.

Answer 10

Capital gains tax (CGT)
Beneficiary taxable at 18% or 28% and full annual exempt amount available.
Inheritance tax (IHT)
Gift into trust is a potentially exempt transfer (PET). Assets are treated as inside the beneficiary’s estate for IHT purposes.

Question 11

CGT in periods of absence
• The last 36 months of ownership.
• Any period of ownership during which client is employed abroad with no duties being carried out in the UK, as long as both preceded and followed by residence.
• Periods totalling up to three years for any reason as long as both preceded and followed by residence.

Answer 11

• If it has been their main residence, if during the period of ownership all of the house, or any part of it, has been let as residential accommodation the gain attributable to the period of letting is only chargeable if it exceeds the lower of £40,000, and the relief attributable to owner occupation.
• Any periods of absence not covered by exemption will be apportioned relative to the total period of ownership.

Question 12

Ordinary POA
• It would come to an end if Donor dies, becomes bankrupt or becomes mentally incapacitated; or
• if Attorney dies, becomes bankrupt or becomes mentally incapacitated.
• It would also come to an end if Donor revokes the general power or it comes to the end of a specified term.
• Cannot be registered with the Office of the Public Guardian.

Answer 12

How to create Power of Attorney
• Doner would put the power in writing via a deed or by using section 10 short-form.
• This would name the attorney and specify the scope of the power, which can be general or specific.
• The deed must be signed and witnessed.
• The power can be immediately effective or effective from a specified date and the deed does not need to be registered.

Question 13

Interest in Possession Trust
Income tax
• Trustees taxable at either 10%/20% depending on the nature of the income. Beneficiary entitled to reclaim tax on interest where they suffer a lower rate but not on dividends. HRT beneficiary will have additional tax to pay.
Capital gains tax (CGT)
• Trustees taxed 28% on trust disposals and a maximum of half the annual exempt amount.
• Trusts annual exempt amount is split between number of trusts (excluding bare trusts) established by settlor to minimum of £1,090 per trust for 13/14.

Answer 13

Inheritance tax (IHT)
• Gift into trust is a chargeable lifetime transfer (CLT). Periodic and exit charges will also apply to the trustees. Settlement will generally benefit from its own full nil-rate band (NRB) at 10-year point.

• Tax is payable at entry at one half of the death rates, 20%. Where the settlor pays tax, the gift is grossed up resulting in a tax rate of 25%. Tax is due on the element of the gift which is above the settlor’s available nil-rate band.

Question 14

Discretionary Trust
• Income tax
The trustees are liable to any income tax arising. The trust has basic rate band of £1,000 within which tax is payable at 10% or 20%. (£1,000 split between number of trusts (except bare trusts) established by settlor to a minimum of £200.)

• Above this band income is taxable at 45% or 37.5% depending on source (tax deducted at source can be offset) as 2013/14 tax year. Where dividend income is distributed to beneficiaries this will be classed as trust income, not dividend income. Beneficiaries may reclaim any overpaid tax at their own rates.

Answer 14

Capital gains tax (CGT)
• Trustees taxable at 28% on disposals and maximum of half the annual exempt amount.
• Trusts annual exempt amount is split between number of trusts (excluding bare trusts) established by settlor to minimum of £1,090 per trust for 2013/14.
Inheritance tax (IHT)
• Gift into trust is a CLT. Periodic and exit charges will also apply to the trustee. Settlement will generally benefit from its own full NRB at 10-year point.
• Tax is payable at entry at one half of the death rates, 20%. Where the settlor pays tax, the gift is grossed up resulting in a tax rate of 25%. Tax is due on the element of the gift which is above the settlor’s available nil-rate band.

Question 15

Discretionary Trust
Benefits
• Reduces value of their estate.
• Retain control if they are trustees and can decide what to distribute and when.
• Allows for additional grandchildren.
• Trustees can use a variety of tax wrappers.
• Investment protected from creditors.
• As beneficiaries have no right to income or capital, the trust assets would not form part of their estates on death.

Answer 15

Drawbacks
• Possible IHT charge at outset.
• Possible further IHT charge if die within seven years.
• Possible periodic and exit charges.
• No personal allowances to set against income.
• Reduced annual CGT exemption.
• Can impact on IHT effectiveness of further transfers/gifts in the next seven years.
• Trust income taxed at 45%/37.5%.

Question 16

Vulnerable Person Trust
• Provided the beneficiary meets the criteria of the Mental Health Act (1983) the assets of the trust may be split to create a vulnerable persons trust.
• Beneficiaries element of assets must be identified, kept separate and used only for the vulnerable beneficiary.
• Trustees calculate the trust’s Income Tax assuming no claim for special treatment.

Answer 16

• The trustees and the vulnerable person must make a joint election by completing form VPE1 not more than 12 months after 31 January following the end of the relevant tax year.
• Calculate what Income Tax the vulnerable person would have had to pay on their designated portion of the trust fund.
• Trustees can then claim the difference between these two figures as a deduction from the trust’s Income Tax liability.

Question 17

Investment Bond
Chargeable event
Tax is only payable when a gain is calculated on a chargeable event. The following are chargeable events:
• Death giving rise to benefits
• Assignment of all rights under the policy for money or money’s worth
• Maturity (if appropriate)
• Policy loans
• Surrender of all rights under the policy
• Certain part surrenders and part assignments
• Classification of the policy as a personal portfolio bond

Answer 17

• Investment bonds allow up to 5% a year to be withdrawn. This allowance is tax deferred and is cumulative so if no withdrawals are made in year 1, 10% can be withdrawn in year 2 and so on.
• The allowance continues until all of the original investment has been withdrawn.
• Investment bonds are classed as a non-income producing asset which means they don’t normally appear on tax returns, which may be particularly important for trustees and individual investors.
• Withdrawals within the 5% allowance described above will not erode or eliminate age related allowances or tax credits.

Question 18

Cost saving idea payment
• If part of a formal scheme, the first £5,000 will be tax free, provided the idea is implemented and the award is not more than 50% of the net benefit to the employer in the first year, or 10% of the net benefit over five years.
• Any excess will be taxable
• If not part of a formal scheme then award is fully at marginal rate.

Answer 18

Long service award
It is not a taxable benefit, as when employed for at least 20 years, and the award is not more than £50 for each year of service, providing not received a similar award within the past 10 years.

Question 19

Child benefit tax charge
• The income tax charge applies where an individual, or their partner, receives child benefit and their adjusted net income exceeds £50,000.
• The charge is 1% of the amount of child benefit received for every £100 of income over £50,000. Amount of child benefit x 52.

Answer 19

• The child benefit tax charge is collected through self-assessment, but as Charles is employed it should be possible for him to opt to have the additional tax liability collected under PAYE.

Question 20

Tax Credits
• Couples must claim jointly using TC600 form.
• Can be backdated by 1 month.
WTC
• Basic £1,920
• Second adult in family/Lone Parent £1,970
• 30-hour element (at least one person works 30 hours+ p/w) £790
• Childcare 2 or more children 70% of lesser of eligible childcare costs and £300 per week

Answer 20

Income thresholds and withdrawal rates
• Income threshold £6,420

• Withdrawal rate 41%
• First threshold for those entitled to CTC only £15,910

Question 21

EIS qualifying criteria
• Gross assets not more than £15,000,000 before and £16,000,000 after investment. £7+£8mil before April 2012.
• Qualifying trade for at least three years.
• Company must have a permanent establishment in the UK.
• Must be unlisted at time of investment.
• The company must not be a 51% subsidiary of another company.
• The company must not have any subsidiaries that are not 51% subsidiaries.

Answer 21

• Fewer than 250 full-time employees - 50 before April 2012
• Have raised no more than £5,000,000 under the Venture capital schemes -EIS/SEIS/VCT- in the 12 months ending on date of subscription.
• If any share issue breaks that limit, none of the investors in that issue will be able to claim any of the EIS tax reliefs.
• Shareholding must not exceed 30%.
• Subscription must be for new shares.
• Carrying out the trade for which the money was raised for at least four months before an investor is eligible for EIS relief.

Question 23

EIS qualifying criteria 2
Qualifying trades for the company exclude the following:
• Dealing in land, commodities, futures, shares or securities.
• Farming and market gardening.
• Property development.
• Oil extraction activities.
• Forestry and timber production.
• Shipbuilding and coal and steel production.

Answer 23

• Banking, insurance (but not insurance broking), money lending, debt factoring, hire purchase financing.
• Dealing in goods otherwise than in the course of any ordinary trade of wholesale or retail distribution.
• Operating or managing hotels or guest houses.
• Leasing or receiving royalties or license fees.
• Legal or accountancy services.
• Operating or managing nursing or residential care homes.

Question 24

EIS Income Tax
• A qualifying investor will attract EIS Income Tax Relief at 30% of any EIS investments, subject to having sufficient taxable income.
• The maximum level of investment qualifying for EIS income tax relief is £1,000,000 per investor in one or more qualifying EIS investments per tax year. As a result, up to £300,000 tax relief can be claimed by the investor, providing they have a sufficient taxable income to allow full relief, and makes no other EIS investments in the tax year.

Answer 24

• An investor can carry back 100% of their investment to the previous tax year for income tax purposes, subject to the overall annual investment limit of £1,000,000. Therefore, an investment made in 2012/2013 can be carried back to the 2011/2012 tax year.
• In order to qualify for EIS Income Tax Relief, an investor must hold a qualifying investment for a minimum period of three years from the date of issue, or when trade commences if later.
• Dividends are taxable

Question 24

EIS CGT
• CGT can be deferred for up to 3 years.
• The latest date for making a claim for Capital Gains Tax Deferral Relief is five years after the first 31 January after the tax year in which the shares were issued.
• The EIS shares you subscribe for must be issued to you in the period beginning 12 months before, and ending 36 months after, the date of the disposal for which you wish to claim relief.

Answer 24

• Provided the ordinary shares (on which Income Tax Relief has been claimed and not subsequently withdrawn) are held for the minimum qualifying period of three years from the date of issue, or the date the trade commenced if later, any subsequent gain made on the disposal of the ordinary shares will be exempt from Capital Gains Tax.
• Capital loss can be claimed but is reduced by any income tax relief received.

Question 25

EIS
Where the EIS shares are sold within 3 years, the EIS investor receives value or an option is placed over the shares, then the EIS tax reducer is clawed back.
The clawback is the lower of:
• Original income tax reducer; and
• 30% x sale proceeds received (only applicable if sold for a loss)
• There can also be a claw-back if the company loses its EIS status within 3 years
• Shares in EIS companies held for at least two years will normally qualify for 100% business property relief for IHT purposes

Answer 25

SEIS
Where the SEIS shares are sold within 3 years, the SEIS investor receives value or an option is placed over the shares, then the SEIS tax reducer is clawed back.
The clawback is the lower of:
• Original income tax reducer; and
• 50% x sale proceeds received (only applicable if sold for a loss)
• There can also be a claw-back if the company loses its SEIS status within 3 years.
• Shares in SEIS companies held for at least two years will normally qualify for 100% business property relief for IHT purposes

Question 26

SEIS 2
• The company has to trade in an approved sector – generally not in finance or investment, for example, a property company raise capital as a SEIS.
• Investors cannot control the company receiving their capital/have more than a 30% stake in the company in which they invest
• provide for an exemption from CGT on gains on shares within the scope of the SEIS; gains realised from disposals of assets in 2012-13, where the gains are reinvested through the new SEIS in the same year.

Answer 26

• CGT exemption not applicable if no income tax relief claimed.
• The shares must be fully paid up at the time of issue and held for at least three years in order to qualify for the full SEIS tax relief.
• The company must not have any subsidiaries that are not 51% subsidiaries.
• No EIS or VCT investments can previously have been made into the company.

Question 27

Seed enterprise investment scheme (SEIS)
• Targeted at smaller, start-up/new companies
• Income tax relief at 50% on investments up to £100,000 per tax year.
• Relief can only be up to tax liability.
• Relief can be carried back 1 year - will apply to shares issued on or after 6 April 2012, so can only be carried back to 12/13.
• Investor can be a paid director at the time of investment, as long as they are not otherwise connected.

Answer 27

• Company has been trading for less than two years, with assets of not more than £200,000 and with fewer than 25 employees.
• Reinvested gains completely tax free from CGT, up to maximum of £100,000
• Dividends are taxable.
• Any one company can raise no more than £150,000 in total via SEIS investment in 3 years.

Question 28

Venture Capital Trust
• Income tax relief at 30% of the amount invested in subscribing for new shares (maximum investment of £200,000).
• There is no carry back of a VCT subscription to the previous tax year.
• Dividends are exempt from income tax provided that in the year of acquisition the market value of the qualifying shares did not exceed £200,000 or, where the limit is exceeded, the dividends in respect of the first shares acquired up to the limit are exempt.
• No relief is available on capital losses.

Answer 28

Where the VCT shares are sold within 5 years, the VCT tax reducer is clawed back.

The claw back is the lower of:
• Original income tax reducer; and

• 30% x sale proceeds received (only applicable if sold for a loss)

• There is also a claw back if the VCT loses its approved status within 5 years.
• No Business Property Relief available.

Question 29

Venture Capital Trust qualifying criteria
• The VCT’s ordinary shares must be listed in the Official List of the London Stock Exchange or on any other EU Regulated Market. A listing on AIM will not satisfy this requirement.
• The VCT must not be a close company (i.e. UK resident and controlled by 5 or fewer shareholders or any number of directors).
• The VCT’s income must be derived wholly or mainly from shares or securities.
• The VCT distributes by way of dividend at least 85% of its income from shares.
• No more than 15% by value of the VCT’s total investments can be invested in any one company.

Answer 29

• At least 70% of the VCT’s investments must be in unquoted trading companies carrying on a qualifying trade.
• For shares acquired before 6 April 2012 (or acquired after that date by funds raised before 6 April 2012) at least 30% of the VCT investments in qualifying companies are in the form of ordinary non-preferential redeemable shares. From 6 April 2012 at least 70% (by value) of the VCT’s qualifying investments must be in “eligible shares”.
• The VCT’s investment in a company when added to all VCT, EIS and SEIS investments made in that company in the twelve months ending in the investment cannot exceed £5 million.

Question 30

Remittance Basis Charge
Non UK domiciled
• will be taxed on worldwide income and gains unless they elect for the remittance basis.
• if they make the election, then if they have been resident for at least seven out of the last nine tax years, they will have to pay the annual tax charge of £30,000
• no charge if unremitted foreign income/gains are less than £2,000

Answer 30

• they will still be taxed in the UK for income/gains but if taxed on remittance basis they lose their Income Tax personal allowance and annual CGT exemption.
• the election can be made annually.
• if they pay the tax charge, they can remit foreign income and gains up to a taxable value of £30,000 without further UK tax liability.
• annual charge will rise to £50,000 when resent for 12 out of the last 14 tax years.

Question 31

Process of Bankruptcy
• If the Court agrees to the application, subject will be adjudged bankrupt and control of his property will pass to the official receiver (OR).
• Subject must submit a statement of affairs to the OR within 21 days.
• The OR decides whether to call creditors meeting at which the creditors can appoint a TIB.
• If the creditors do not appoint a trustee, the OR takes on the role.

Answer 31

• The trustee/OR would collect all subject’s property and sells it, then makes payment to the creditors in the prescribed order of priority.
• Subject’s bankruptcy will normally be discharged after one year, unless he is deemed to have been culpable/irresponsible/reckless, in which case a bankruptcy restriction order of 2 to 15 years may be imposed.
• Subject can be discharged at less than one year at OR’s discretion.

Question 32

Bankruptcy
•If pension scheme is registered with HM Revenue & Custom’s it would not be treated as part of estate and would not form part of the bankruptcy, so it cannot be claimed by the Trustee in Bankruptcy (TIB), unless the TIB can show excessive contributions/intent to defraud creditors.
•Ownership of investments will pass to the TIB and remain in the TIB’s ownership even if individual is discharged.

Answer 32

• Any income from the investment will be claimed by the TIB.
• TIB could encash the investments and use the proceeds to repay creditors.

Assets that can be kept
Items needed for employment such as tools/books/car

Household items - e.g. Clothing, bedding, furniture

Question 33

Actions that are prohibited for someone who has been declared bankrupt.

• Attempt to obtain credit without disclosing status.
• Deal in or dispose of own property, with intent to defraud creditors.
• Conceal any debts or assets from the trustee in bankruptcy.

Answer 33

• Destroy or falsify any records of their affairs.
• Give preference to creditors.
• Leave the country with any property.
• Make false statements to the trustee.
• Cannot be a director or start another business.

Question 34

IHT - payment timescale and sources
• No later than six months from the end of the month of death.

• Direct beneficiaries can use personal funds/their share of the pension fund (if applicable) or take out a loan/borrow from trust (if applicable) on commercial terms.

Answer 34

• Executor could use estate assets.
• The executor can borrow money against the estate, can also apply to HM Revenue & Customs for deferment/payment by instalment or take out a bridging loan/probate loan.
• Trustees can use the assets from discretionary trust.

Question 35

Executor role on death.

• Determine the value of the estate.
• Submit the Inheritance Tax (IHT) return.
• Obtain probate.

Answer 35

• Collect assets of the estate.
• Pay debts/outstanding tax of the estate.
• Settle the IHT liability.
• Distribute the estate in accordance with the Will.

Question 36

Trustee Delegation
• Collective delegation is where trustees delegate certain functions, as a collective body, to agents. An example of collective delegation is where trustees instruct an estate agent to sell a trust property.
• Individual delegation happens when an individual trustee, who is unable to act for a period (perhaps because of absence abroad), delegates his powers and discretions to another.

Answer 36

Individual Delegation.

• Delegation must be by power of attorney and must be for a period of not more than a year.
• Written notice of the power of attorney must be given to the appointer and all other trustees within seven days of its execution.
• Trustee will be liable for the acts/defaults of the power of attorney as if they were their own.

Question 37

Trustee considerations
• Whether another trustee should be appointed (if sole trustee).

• The suitability/diversity of the trust fund/asset allocation and whether it still meets the needs of the beneficiaries/trust objectives/any specific instructions in the trust deed.

Answer 37

• Whether any trust income or capital should be distributed/when monies will be needed.

• Tax-efficient distributions.
• Any periodic or exit charges.
• How any IHT liability will be met.
• The Trustee Act 2000/legislative changes.

Question 38

Trustee Removal
R: refuses to act
E: expires, dies. The Trustee Act S18 allows the remaining trustee(s) to exercise their powers. If a sole trustee dies, their LPRs can act as trustees pending an appointment.

Answer 38

P: prevented as unfit to act, for example, bankrupt.
L: leaves the UK for more than one year
A: asks to be discharged
C: corporate trustee body is dissolved
E: e is only a baby - under 18
S: sanity lost so unable to act

Question 39

Trustee Investment

What the recourse would be if it is proven the person acting as trustee made an inappropriate investment with the trust property

Answer 39

• Issue an injunction to stop a course of action being taken.
• Order the trustee to reimburse the beneficiary.
• Order the return of any trust property wrongly transferred.
• Setting aside the unauthorised transaction.
• Having the trustee replaced.

Question 40

Main uses of trust
P: protection from creditors, for example on bankruptcy
U: U can be sure who will get the money
R: reduce taxation - IHT and/ or income tax. Use of wills
P: pension provision

Answer 40

O: ongoing family financial support, for example, life tenant provision, cash on death of the breadwinner, ownership of property (joint tenancy and tenants in common)
S: speedy payout on death
E: enable vulnerable person to be looked after - parents for minors, disabled/ vulnerable people

Question 41

Lasting Power of Attorney
• There are two types of LPA – health and welfare, and property and financial affairs.
• Must be registered with the Office of the Public Guardian at outset.
• A prescribed person must provide a certificate showing donor understands LPA.
• Minimum of one certificate provider, or two if there are no other people to be told.

Answer 41

• Health and Welfare variant can only be used when donor unable to make own decisions.

Enduring Power of Attorney
• EPA can only be used for property and financial affairs.
• Unlike LPA which comes into effect immediately, EPA only come into effect once donor is unable to make own decisions.

Question 42

Offshore Investment Bonds
• If a reporting fund, Income Tax is on client’s share of fund income whether distributed or not.
• Dividends carry normal 10% tax credit.
• If a qualifying bond fund/more than 60% in interest-bearing investments, then taxable at interest
rates without any tax credit/interest assumed paid gross.

Answer 42

• Profit on encashment subject to normal CGT rules with CGT exemption available.
• If a non-reporting fund, the gain on disposal is calculated on CGT principles but is liable to Income
Tax in the year of encashment at client’s marginal rate.
• The annual CGT exemption is not available.

Question 43

Whole of Life to be qualifying:
• Must secure a capital sum on death or earlier disability.
• Premiums paid annually or more often for at least 10 years.
• Premiums paid in 1 year can’t exceed twice that paid in any other.

Answer 43

• Premiums paid 1 year can’t exceed more than 1/8th paid over whole term or over 10 years where premiums payable throughout life.
• Policies effected since April 1976 the sum paid on death must equal a minimum of 75% of premiums payable up to the assured’s 75th birthday.

Question 44

Endowments to be qualifying
• Must secure a capital sum on death or earlier disability.
• Premiums paid annually or more often for at least 10 years.
• Premiums paid in 1 year can’t exceed twice that paid in any other.

Answer 44

• Premiums paid 1 year can’t exceed more than 1/8th paid over whole term or over 10 years where premiums payable throughout life.
• 75% of total premiums payable must be minimum sum assured but for policies since 1976 this is reduced by 2% for each year over 55 from outset.

Question 45

Temporary Assurances exceeding 10 years
• Must secure a capital sum on death or earlier disability.
• Premiums paid annually or more often for 10 years or 3/4 of term whichever is shorter.
• Premiums paid in 1 year can’t exceed twice that paid in any other.

Answer 45

• Total premiums paid 1 year can’t exceed more than 1/8th rule.
• 75% rule re life cover unless the assurance has no surrender value & will not run beyond age 75.
Temporary Assurances for 10 years or less
• Capital sum on death or earlier disability.
• Term can’t be less than one year for policies effected post 1979.