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AF1 - Tax and Trust Planning > Trust Taxation > Flashcards

Flashcards in Trust Taxation Deck (13)
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1
Q

How do you calculate periodic charges on discretionary trusts?

A
  1. Current Value of Trust - Nil Rate Band = A
  2. A x 30% x 20% = Charge (B)

To get the effective rate of the charge…

B/Current Value x 100 = Effective Rate

2
Q

How to you calculate the initial charge on a discretionary trust?

A

Only if transfer is above NRB

(Value of transfer - Nil Rate Band) x 20%

If the settlor pays the tax on transfer then..

(Value of transfer - Nil rate Band) / 0.8 x 20%

3
Q

How do you calculate what exit charge is due on a discretionary trust?

A

Value of transfer x quarters/40 x Effective Rate

For an 18-25 trust the period starts at age 18

4
Q

What differentiates and Trust from a Contract?

A

Trust

No offer and acceptance needed

Beneficiaries may not even be aware of trust

No consideration needed

Minors can be beneficiaires

Trustees are legal owners of assets, Beneficiaries are beneficial owners and can enforce things on the trustees

5
Q

What differentiates and Contract from a Trust?

A

Contract

Offer and acceptance are required

Consideration required

All parties must be aware of the arrangement

A contract with a minor is unenforceable

Only those party to the contract have a legal entitlement

6
Q

What is the taxation treatment for an Interest in Possession Trust?

A

NO STARTING RATE BAND

Basic rate Tax on everything so…

Savings Income @ 20%

Dividends @ 7.5%

Other Income @ 20%

Trust expenses deducted from dividends first before getting beneficiaries income

Any further tax due by beneficiaries is paid on net income received, LESS the grossed up trust expenses

Probably easier for admin to mandate income DIRECTLY to beneficiaries to avoid any tax reclaim etc.

7
Q

What is the taxation treatment of a Discretionary Trust?

A

Discretionary Trusts get £1,000 starting rate band (Basic Rate) to apply to income

Dividends in the starting rate band @ 7.5%

Other income in the starting rate band is at 20%

Anything over £1,000 is chargeable at trust rates (Additional Rate)

That means dividends at 38.1% and everything else at 45%

Income paid to beneficiary comes with a 45% tax Credit (assumed tax paid)

If the beneficiary has lower tax rates then they can claim it back

8
Q

How are Charitable Trusts different?

A

Not subject to the law on perpetuitites

Can only accumulate income for 21 years though

Cannot be voided for uncertainty of trust

Can be reassigned to another similar charitable purpose

Exempt form Income Tax and CGT

Gifts to charitable trusts are exempt from IHT

9
Q

When can a trustee be replaced?

A

When a trustee….

Dies

Remains out of the UK for over a year

Wants to be discharged

Refuses to act

Is unfit or incapable

Is a minor

10
Q

How are trustee expenses deducted from trust income?

A

Deducted from gross income received before being taxed and distributed

Tax credit for this is based on the amount of expenses grossed up.

11
Q

How does a Discounted Gift Trust work?

A

Donor make a lifetime gift to a bare trust (PET) or discretionary trust (CLT)

Donor then receives a fixed income for life from the trust

The income is given a capital value based on life expectancy and income payments

This capital value is the amount by which the gift is discounted

And leaves the estate all together

Usually invested in a bond and the 5% tax deferred withdrawals are the fixed income payment (return of capital)

Any growth on the bond is outside the estate for IHT

Best for those with long life expectancy and will spend the fixed income they receive

12
Q

How is the discount for a DGT calculated ?

A

Actuarial calculation

Expected payments until death
Frequency of payments
Age of settlor
Health of settlor

Life office decide the discount but HMRC can decide this if death within seven years

13
Q

How does a loan trust work?/

A

Donor makes a loan to the trust

Will be a CLT, and loan used to fund a bond

The loan is paid back in instalments

Any growth is outside the estate for IHT

Fixed loan repayments are made that reduce the overall debt

On death, any remaining debt must be paid back to the estate

So long as loan repayments are spent then the debt repaid will be less than the original gift