Relevant Property trust Regime

Question 1

What is a relevant property trust?

Answer 1

Generally a discretionary trust or any other type of trust, Exceptions:

1. An absolute (bare) trust bc the beneficiary has an absolute right to trust capital & income.
2. A transitional serial interest trust –
3. An immediate post-death interest trust –interest-in-possession trust created under a will.
4. trust for a disabled person
5. a trust for a bereaved minor
6. an 18–25 trust

Income and gains received by relevant property trusts are treated as belonging to the trustees rather than a beneficiary, and special rules apply.

Question 2

What is a non-relevant trust?

Answer 2

treated as potentially exempt transfers (PETs) &no lifetime.

In principle, income and capital gains are regarded as belonging to the beneficiary, and so are taxed on the beneficiary, rather than the trust.

Question 3

How is a discretionary trust taxed?

Answer 3

standard-rate band of £1,000, which is subject to 8.75% income tax on dividends or 20% on other income.

Any income in excess of the standard-rate band is taxed at an overall trust rate of 39.35% on dividends and 45% on other income.

-not eligible for the personal savings and dividend allowances.

-CGT annual exempt amount of half the standard exempt amount available to individuals

Gains in excess of the annual exempt amount are taxed at the higher rates of 20% or 28% (for property).

Question 4

How is an interest in possession taxed?

Answer 4

-basic rate of tax applicable to each source of income received by the trust: 8.75% on dividends or 20% on other income

-do not have a personal allowance and are not eligible for the personal savings and dividend allowances.

-

Question 5

how is CGT applied at death?

Answer 5

There is no CGT on any gains made (up to the point of death) on assets in someone’s estate; in effect any CGT liability dies with them because IHT applies. The full value of the assets will form part of the estate subject to IHT.

Question 6

What is hold over relief on transfers into a trust?

Answer 6

Hold-over relief means that the transferor does not pay the tax and any gain is transferred with the assets

• the trust will receive the shares with at the cost value– the shares are treated as if the trust had acquired them at the original value, and the trust will be liable to CGT on any gain made when it subsequently disposes of the shares.

Question 7

When does the 14yr look back apply?

Answer 7

• A failed PET
• a PET is made followed by a CLT, the PET would only be taken into account if it was made within seven years of death – the 14-year rule does not apply

However, if a PET is made within seven years of death, and is then followed by a CLT, the amount of the failed PET is deducted from the NRB available to the trustees when calculating any IHT due on the CLT as a result of death and on the periodic charge and exit charges on the trust.

Question 8

What kinds of trust immediately reduces an estate?

Answer 8

Discounted Gift trust: investment bond : The term “discounted” is used because the value transferred on establishing the trust may be less than the amount invested.

Question 9

What is a bare discounted gift trust?

Answer 9

A PET: The trust fund is within the beneficiary’s IHT estate. (In this context the trust fund is the policy/bond value less the value of the settlor’s rights to payment.)

Question 10

what is the tax on discounted gift trust if a chargeable event occurs? i.e investment bond surrendered, excess withdrawals, death

Answer 10

1. Settlor is alive - any tax is chargeable to them, based on their own tax position in that tax year and using the standard bond calculation methodology;
2. Died in a tax year before chargeable event, and the trustees are UK resident, the trustees will be chargeable at the trust rate of 45%, but a credit for tax already paid (20%) in fund
3. died in a tax year before the chargeable event, and trustees are not UK resident, the beneficiary will be chargeable to income tax based on how much benefit they receive. The 20% deducted in the fund cannot be credited in these circumstances.

Question 11

what happens on a offshore bond in discounted gift?

Answer 11

For an offshore bond the position is similar in terms of who pays the tax, but there is no 20% deduction in the fund. This means the liability will be for the full 45% for trustees, and the settlor and beneficiaries will pay the full rate of tax applicable to their position.

Question 12

What is a gift and loan trust?

Answer 12

You don’t have to just give your money to a trust, you can loan your money to a trust. The trust can invest monies, pay you back the principal and keep the proceeds earned.

Has to be a bond issued after the trust was set up, can’t use an existing bond

Question 13

What are tax report requirements for trust?

Answer 13

All UK express trusts have to register (TRS) regardless if they expect to incur a liability to UK tax, unless they are excluded from registration.
Some non-UK express trusts also need to register

Question 14

What are trust required to report?

Answer 14

1. reliefs claimed;
2. capital transactions between trustees and settlor;
3. discretionary distributions of income to beneficiaries;
4. election for special income tax treatment for vulnerable beneficiaries.

Question 15

When is capital gains tax paid?

Answer 15

by 31 January following the end of the tax year.
However, for UK property disposal, CGT must be reported and paid within 60 days.

Question 16

When is income tax paid?

Answer 16

50% in January and then 50% in July

Question 17

How do you calculate quarter up basic point?

Answer 17

Take the difference between the price and x by 25%

£59.80 to £61.20, = (61.20-59.80) x .25 = 60.15

Question 18

A discounted trust?

Answer 18

A discounted gift trust is usually set up in connection with an investment in either an onshore or offshore investment bond. The trust allows the gifting of a lump sum into a trust while retaining a lifelong ‘income’ from that money, with the overarching aim of reducing the eventual IHT bill on death. Provided the settlor is in reasonable health, a calculation is made of the likely total amount of ‘income’ that will be paid back to them by the trustees.

These rights, known as the ‘discount’, are deemed to be retained by the client. The remainder will be treated like any other gift into trust. As with any transfer, the type of trust determines whether the gift is treated as a chargeable lifetime transfer or a potentially exempt transfer.

In the event of the settlor dying within seven years, this retained ‘bag of rights’ should in theory be returned to their personal representatives. However, the accepted IHT treatment, as has been tested many times and accepted by HMRC, is that this right to an income for life has no value once the settlor has died, and therefore no money has to be returned.

The effect is that the discount is deemed to leave their estate on day one of settlement of monies into the trust – the remainder will be treated like any other gift into trust and brought back into calculations if death occurs within 7 (in some cases 14) years. In effect, there is an immediate IHT reduction upon creation of a discounted gift trust.