Taxation of Trusts

Question 1

Does the taxation of trusts impact a trustee’s own tax position?

Answer 1

No

Question 2

Trustees are jointly liable for self assessment on the Trust, who completes it?

Answer 2

One Trustee completes it

Question 3

What is the tax position if a settlor or their partner retains an interest in a trust?

Answer 3

Liable to income tax even if doesn’t receive the income, if set up for an unmarried child under 18 income treated as his own if exceeds £100 p.a. (Except trusts for the vulnerable)

Question 4

What are the five types of Trust for tax?

Answer 4

Bare
Trusts for Vulnerable Beneficiaries
Interest in Possession
Discretionary
Accumulation and Maintenance

Question 5

What is the priority order for expenses in a Trust and what is the basic tax rate for each of three sources of income?

Answer 5

1. Dividend 7.5%
2. Savings 20%
3. Other 20%

Question 6

How is a Bare Trust treated for Income Tax

Answer 6

Beneficiary includes on their tax return and pays tax after deducting personal allowance

Question 7

How is income from a parent to an unmarried minor treated in a Bare Trust

Answer 7

If income more than £100 treated as parents

Question 8

Who are Trusts for Vulnerable Beneficiaries for?

*They have been around since 2004

Answer 8

Disabled
Mentally incapacitated
*Under 18 and lost a parent, *this includes; Statutory Trusts / Will Trusts / Criminal Compensation Trusts - they give the child income to age 18 at which point they are entitled to the capital.

Question 9

What happens if there is more than one beneficiary and only one qualifies as a Vulnerable Beneficiary

Answer 9

Only the Vulnerable Beneficiary qualifies for special Trust Tax treatment

Question 10

What is the Definition of disabled to qualify as Vulnerable Beneficiary (there are four circumstances)?
*Only qualifies if the Trust property can only be used by the disabled person and they are entitled to any income from it.

Answer 10

(1) Mentally unable to look after their affairs
(2) Care element of Attendance Allowance
(3) *PIP
(4) *DLA
* Middle or higher rate

Question 11

How is Income Tax calculated on a Trusts for Vulnerable Beneficiaries

Answer 11

1 Calculate tax if no special treatment
2 Calculate tax if based on own tax position
3 Trustees claim back the difference and deduct from liability

Question 13

What is an Interest In Possession Trust?

Answer 13

One or more beneficiaries have the right to income as it is generated.

Question 14

How to calculate Income Tax on an Interest in Possession Trust

Answer 14

Trustees pay beneficiary after first deducting BRT and then expenses
Trustee provided beneficiary with R185E
Beneficiary adds grossed up income after expenses received to their taxable income with BRT credit
*Alternatively income could be paid directly to the beneficiary rather than passing it through the trust which could reduce expenses and allow the beneficiary to make a tax reclaim

Question 15

Describe how to calculate the Gross Trust income and Tax credit for an Income in Possession Trust Beneficiary?

Answer 15

(Net income - expenses) Grossed up = Gross Income

(Gross Income x 20%) = Tax Credit

Question 16

How are Trustees of a Discretionary Trust taxed?

Answer 16

Tax paid by trustees if accumulated or paid out
Expenses chargeable to income are grossed up and set against income
Standard Rate Band (£1,000) divided by all of the settlor’s trusts
BRT up to Standard Rate Band (20% or 7.5%)
ART paid by trustees for income above standard rate band (45% or 38.1%)

Question 17

What is the priority order for applying the Discretionary Trust standard rate band and what is the minimum per Trust when a settlor has multiple trusts?

Answer 17

1. Non Dividend Income 20%
   2.Dividend Income 7.5%
   Minimum of £200 per Trust

Question 18

When the Trustees of a Discretionary Trust distribute income it is treated by the beneficiaries as if tax already paid at 45%, so what must the Trustees ensure?

Answer 18

They have paid enough income tax in current or previous years to cover the 45% tax credit, the Tax Pool keeps track of the tax the trustees have paid and if insufficient they must pay the difference.
A shortfall can arise due to some of the income falling in the standard rate band / gains for life policies entering the trust

Question 19

How are Beneficiaries of a Discretionary Trust Taxed

Answer 19

Only pay tax if income paid out
It is treated as trust income so can not use any allowances
Received with a 45% tax credit, can claim difference back if not ART payer
If trustees paid less than 45% (by using the standard rate) trustees pay the difference or if no “tax pool” they should distribute less

Question 19

CGT on trusts?

Answer 19

?

Question 20

Is CGT payable when a beneficiary becomes absolutely entitled to settled property?

Answer 20

Yes