Tax Compliance for Trust Flashcards
How is a interest in possession taxed?
The trustees taxed basic-rate. This will be 8.75% on dividends or 20% on non-dividend income.
No personal or dividend allowance
cannot set trust expenses against trust income when calculating tax payable, but the expenses can be set against the beneficiary’s income from the trust
What tax do the beneficiaries of Int in possession taxed?
- a non-taxpayer they can reclaim 20% tax on interest and 8.75% on dividends;
-a basic-rate taxpayer, there is no more tax to pay;
-a higher-rate taxpayer, they will be liable for a further 20% tax on gross interest – they will have to pay 33.75% on dividends (less the 8.75% paid by the trustees);
-an additional-rate taxpayer, they will be liable for a further 25% tax on gross interest and will pay 39.35% on dividends (less the 8.75% paid by the trustees).
The trustees cannot set trust expenses against trust income when calculating tax payable, but the expenses can be set against the beneficiary’s income
What is mandating?
An alternative is for the trustees to arrange for income to be paid directly to a beneficiary, instead of passing through the trust. This is known as ‘mandating’. In this case, the beneficiary (rather than the trust) will be liable for any income tax due at their own tax rate(s) and using their own allowances.
What is the tax on Discretionary trust?
-standard-rate band of £1,000, which is subject to 8.75% standard-rate tax on dividends or 20% on other income.
-income in excess of the standard-rate band is taxed 39.35% on dividends and 45% on other income
not eligible for the personal savings and dividend allowances.
-If income is paid to a beneficiary, it carries a 45% tax credit
-can set trust management expenses against trust income. This means the amount of income used to pay expenses is still taxed at the basic-rate, but avoids the higher trust rate.
What is the tax on a vulnerable beneficiary?
-can make a joint ‘vulnerable person election’. . .allows the trustees to pay at the same rates that would apply direct to beneficiary. Once an election is made, it is irrevocable and end when a bereaved minor reaches the age of 18 or a disabled beneficiary dies
-special tax treatment will only apply if the part of the fund used to provide for the vulnerable beneficiary is kept entirely separate (ie ringfenced)
What is a discretionary tax pool?
a record that the trustees to show, at the difference between:
the total income tax entering the tax pool that year, plus the amount carried over in the tax pool from earlier years;
the total value of the 45% tax credits attached to income payments to beneficiaries that year.
This is to ensure there’s always enough payment for beneficiaries to claim the 45% tax credit
How is capital gains tax applied?
- Like normal, some assets are exempt and any loss on a non-exempt asset can be offset against gains.
may also be able to claim business asset disposal relief (subject to the lifetime limit of £1m per beneficiary) on certain business assets.
The gain is value at the date the assets were transferred, unless hold-over relief applied: the gain will be based on the settlor’s original acquisition cost.
-trust’s annual exempt amount equal to half of the amount available to individuals
-must be divided equally between all trusts created after 7 June 1978 by the same settlor, with a minimum of one fifth of the trust exemption for each trust.
-gain in excess of the annual exempt amount is taxed at 20% (unless the gain is on a non-exempt residential property, in which case the rate of CGT will be 28%).
What are the 3 types of qualifying interest in possession trust?
With a qualifying IIP: The trust is not subject to periodic or exit charges
1.Pre-22 March 2006: trust was treated as PET, classed as ‘qualifying IIPs
2. Immediate post-death interest trusts and IIPs created through a will: If the life tenant was the spouse, no IHT on creation of the trust. If anyone else, the would be a chargeable transfer at the normal death rates.
3. Disabled person’s trust: the gift to would be a PET and on the beneficiary’s death the trust assets would form part of their estate for IHT purposes.
What are relevant property IPPs
IIPs set up during the settlor’s lifetime after 22 March 2006 are relevant property regime, CLTs. As a result, trust assets are not included in the estate of the life tenant on their death or of those with a reversionary interest in the trust, such as remaindermen, regardless of whether they die before or after the life tenant. However, an exit charge would apply when the assets are passed on to a surviving remainderman
What are the periodic charges?
each 10 year anniversary the trust is taxed on the value of the trust less the nil rate band available to the trust. The rate they pay on this excess is 6% (calculated as 30% of the lifetime rate, currently 20%). If the value of the trust is less than the nil rate band, there will be no charge.
What are exit charges?
-Exits after the first periodic charge date. The rate of tax applied at the last 10 year anniversary recalculated using the nil rate band at the time of the exit .
-Exits in the first 10 years. The rate is calculated on a notional chargeable transfer of the trust assets immediately after they entered the trust. The effective rate is calculated based on notional tax charge of 30% of lifetime rate of 20% even if the trust was created on death
If the value of the transfer to the trust plus CLTs in the previous seven years was below the NRB, no IHT would have been payable on entry. Therefore, no exit charge would apply during the first ten years as the effective tax rate would be nil.
When do exit charges do not apply?
- Capital distributions are made within three months of setting up the trust, or within three months after a ten yearly anniversary;
- the trustees make an income payment to a beneficiary – no IHT is charged because the beneficiary will be liable to income tax on the distribution;
- the distribution is made to pay trust costs and expenses;
- there is a transfer of excluded property, for example foreign assets owned by a non-UK domiciled trust;
- there are distributions within two years of the creation of a discretionary trust in the settlor’s will;
the payment is made to the settlor under the terms of a discounted gift trust or a loan trust (Pru Adviser, 2021).
What is the importance of the order of gifting?
It is best for CLT to come before PET, so that they can absorb all of the NRB before the PET. It will lower the periodic charge and the CLT charge.
-the ten-year periodic charge on a trust will depend on what other chargeable transfers were made in the seven years before the trust was set up. If the client made a PET in the seven-year period before the trust was set up and then died within seven years, the failed PET is included in the trust’s tax calculation, even if the trust did not benefit from the PET
-If, however, the PET is made after the CLT, it will not be included in the calculation, even if it fails
What are the parameters of a 18-25 trust?
- Assets in an 18–25 trust do not form part of the beneficiary’s estate for IHT until they become entitled to the assets absolutely, which will be between the ages of 18 and 25.
-No charge applies while the beneficiary is under the age of 18, or if the beneficiary receives the trust assets at the age of 18. - it can only run for a maximum of seven years after the beneficiary reaches the age of 18.
When would exit charges apply on a 18-25 trust?
If the trust runs past the beneficiary’s 18th bday, exit charges will apply if a distribution of more than £3,000 is made when
1. the beneficiary becomes absolutely entitled to the trust assets (this would be between the ages of 18 and 25);
2. the beneficiary dies;
3. there is a capital distribution for the beneficiary.
The effective rate is calculated in the same way as the exit charge for a distribution within the first ten years of a discretionary trust.
