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Flashcards in Trusts Deck (72)
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1

What is the taxation of a Discretionary Trust

Trustees are responsible for paying tax on income received by accumulation or discretionary trusts. The first £1,000 is taxed at the standard rate (basic).

If the settlor has more than one trust, this £1,000 is divided by the number of trusts they have. However, if the settlor has set up 5 or more trusts, the standard rate band for each trust is £200.

The tax rates are below.

Trust income up to £1,000
Type of income Tax rate
Dividend-type income 7.5%
All other income 20%

Trust income over £1,000
Type of income Tax rate
Dividend-type income 38.1%
All other income 45%

2

In a trust, there is a Standard Rate of tax on the first £1,000. However, what happens if the person has multiple trusts, what does the allowance go down to?

If the settlor has more than one trust, this £1,000 is divided by the number of trusts they have. However, if the settlor has set up 5 or more trusts, the standard rate band for each trust is £200.

3

Do trustees have the dividend allowance in a discretionary trust?

No, they pay tax at the full rates

4

What is the taxation of an interest in possession trust?

Type of income Income Tax rate
Dividend-type income 7.5%
All other income 20%

Sometimes the trustees ‘mandate’ income to the beneficiary. This means it goes to them directly instead of being passed through the trustees.

If this happens, the beneficiary needs to include this on their Self Assessment tax return and pay tax on it.

5

What is the taxation of a bare trust

It is taxed on the beneficiaries tax position. They will need to declare this on a self assessment form

6

What rate of CGT do trustees pay?

Trustees only have to pay Capital Gains Tax if the total taxable gain is above the trust’s tax-free allowance (called the Annual Exempt Amount).

The tax-free allowance for trusts is:

£6,000
£12,000 if the beneficiary is vulnerable - a disabled person or a child whose parent has died

7

When can a new trustee be appointed to replace a trustee?

-dead
-remains out of the uk for more than 12 months
-wants to be discharged
-refuses to act
-incapable
-under 18

8

What happens if the last trustee dies?

Their legal representives can act as trustees until an appointment is made

9

What happens if a trustee misbehaves

-beneficiary can take legal action against the trustee

If court agrees they can:
-issue injunction preventing the trustee taking the course of action
-order trustee to pay compensation
-order trustee to make restitution
-order return of property wrongly transferred

10

What is a relevant property trust

they are discretionary trusts and most lifetime trusts created in or after 22 March 2006

11

What rate of tax is payable if you make a CLT and the payment is over the nil rate band

When the trust is created, this is classed as a chargeable lifetime transfer and if the settlement is over the nil rate band (or the cumulative amount is), 20% tax is payable upfront by the trustees.  (If the settlor pays, you can use 25% which is 20% grossed up by 20%)

12

What is a trust?

A trust is a way of holding property for the benefit of other people without giving them full control over it

13

What cannot be held by trustees in a trust

ISAs

14

What is the difference between a trust and a contract?

Trusts:

- beneficiary doesn’t have to know about the trust until they are 18
- Beneficiaries can be minors
- no offer and acceptance required
- Trustees are the legal owners but beneficiaries can enforce the terms of the trust

Contract
- offer and acceptance required
- Only the parties have the right to the contract

15

What is a protector on a trust?

- some trusts (particularly offshore trusts) have a protector.
- They allow power to veto decisions made by trustees and can even remove them
- They exist to ensure trustees administrator the trust properly
- Not normally a trustee also

16

Can you be a trustee on a trust if you are bankrupt or in prison?

Yes, but it generally isn’t a good idea

17

What is the difference between a professional trustee and a lay trustee?

-professional trustees likely to have to charge fees, like an accountant or IFA. Will be knowledgable about the trust

-lay trustees are generally family members/friends. Do not have specialist knowledge of running a trust

18

What is the minimum amount of trustees you must have? And what is the maximum?

No limit, but if it is land there must be 2 trustees

For a trust corporation the maximum number of trustees is 4

19

What are the two minimum requirements to be a trustee?

1. Over 18

2. Of sound mind

20

What are the advantages of having a corporate trustee

they can’t die
-professional trustee knowledge

21

What are the disadvantages of having a corporate trustee?

fees can be expensive, especially for a small trust

22

When can you replace a trustee

-dead
-outside uk for more than a year
-wants to be discharged
-refuses to act
-is unfit or incapable of acting
-infant

If the above steps don’t appoint a trustee then one will be appointed by the court.

A trust cannot exist without trustees. A trust doesn’t become invalid because there is no trustees

23

Can beneficiaries force trustees out?

If beneficiaries are over 18 they can force a trustee to retire/ be replaced

24

What happens if a trustee wants to retire?

-they can be replaced
-alternatively they could use a deed of retirement but it can only be done if 2 trustees remain and all other trustees agree.

25

What happens if a trustee dies?

- if 1/2 trustees dies the existing trustee can make the decisions unless it is proceeds of land (minimum 2) unless the sole trustee is a trust corporation
- If the last trustee dies their legal representatives can act until appointment is made by the settlor

26

Can a trustee appoint someone on their behalf, what is the exception?

yes they can appoint others, but they cannot deal with:

-power over distribution of assets
-how fees are dealt with
-appointment of new trustees
-delegation of trustee powers

27

Can a trustee nominate a power of attorney? What are the conditions?

yes but only for up to a year
-written notice must be given to the appointer and all other trustees within 7 days

28

Can lay trustees charge for their time?

Lay trustees cannot charge for their time

29

Can professional trustees charge for their time?

* Professional trustees can charge for their time and can be compensated by the trust assets

30

What is a trustees exemption clause?

* These can be added into the contract and the trustee wouldn’t get into trouble if they made a mistake with investments etc. These wouldn’t work in the event of fraud.