Trusts

Question 1

What are the tax implications on a bare trust

Answer 1

IT - assets are held in the name of the nominee but assets and income belong to the beneficiary, IT is taxed on beneficiary rates and can use allowances
Parental settlements - income taxed on parents where over £100 per parent

CGT - taxed on beneficiary

Iht - transfer is a PET - trust fund is in the estate of the beneficiary

On settlors death if within 7 years fall back into estate and use NRB

Taper relief can be used to reduce tax

Beneficiary liable for tax in iht

Question 2

What are the tax implications on a Interest in possession pre 2006

Answer 2

IT trustee liable for basic rate at 20% tax
Dividends allowance does not apply tax is levied at 8.75%
Tax on other income at 20% via self assessment
Trustee does not pay higher rate tax but beneficiary may be liable to that
No personal allowance for trustee but beneficiary can you own on income received
Beneficiary get tax credit for basic rate which non tax payers can reclaim

CGT - trustee pay tax at 20% or 28%
Trust has half the annual exception.

IHT - transfer as a pet
Potential tax charge if before 7 years and fall back into estate
Can use taper relief

Question 3

What are the tax implications on an Interest in possession trust post 2006?

Answer 3

IT- trustee liable for tax at basic rate of 20%
Dividends allowance does not apply tax is levied at 8.75% basic.
Tax on other income at 20% via self assessment
Trustees don’t pay higher tax rate but beneficiary will have to if in that tax band
No personal allowance for trustees but beneficiary can use their own allowances
No tax relief for trustees on trust expenses but can be used by beneficiary
Beneficiary gets a tax credit for basic rate tax paid by trustee

CGT - trustee pays 20% or 28 for property, trust has annual exemption at half standard rate

IHT - transfer is a CLT potential tax settlement if 20%

Subject to periodic and exit charges

Question 4

Trusts for vulnerable beneficiary

Answer 4

Income be based on beneficiary even if discretionary
CGT - at beneficiary rate if tax with full allowances
IHT it is a pet even if in discretionary trust
No exit charges or periodic

Question 5

What are the tax implications on a Discretionary trust?

Answer 5

IT - trust has a standard rate band on 1k where in the income within the first 1k is taxed at 20% or 8.75%
After this it is at 45% or 39.35©
Trustee expenses are allowable but on reduces by 20%

CGT - trustees pay tax at 20 or 28%
Trust has half standard allowance

Remember where more than one trust split between all…

IHT - transfer is a CLT potential tax charge on settlement at 20%
Subject to periodic charges and exit charges - 6% every 10 years of value in excess of NRB