#13758 - Life Interest Trusts - Private Client

Life interest trusts 1) Life interest trusts created Pre 22nd March 2006 - created during lifetime OR by will Creation of trust a) Life interest trust created during lifetime Overall effect Life tenant is treated as the owner of the trust capital for IHT purposes even though they are only entitled to income - s.49(1) IHTA 1984 Inheritance tax a) PET by settlor Normal lifetime transfer PET rules apply * No IHT to pay on transfer * If dies within 7 years - 40% * Possible taper relief As last date for this trust was 21st March 2006, last date on which the PETs can fail is 20th March 2013 b) Spousal exemption applies to this transfer if spouse is life tenant of trust Capital gains tax a) Is an actual chargeable disposal unless is disposing of: * Cash; or * Treasury shares / govt. bonds Normal chargeable disposal rules apply * Calculate gain * Minus AE (PS11,000) * Reduced gain x 0.18 / 0.28 b) Holdover relief: s.165 a? Available for business assets s.260 a? Not available as is a PET / No corresponding IHT Event b) Life interest trust created by will Income tax No impact on income tax Overall effect Life tenant is treated as the owner of the trust capital even though they are only entitled to income - s.49(1) IHTA 1984 Inheritance tax a) Part of testator's death estate b) Spousal exemption applies to this transfer if spouse is life tenant of trust Capital gains tax No CGT on death Income tax No impact on income tax Normal death estate rules apply * Cumulative total a? NRB * Possible 2 x NRB as TNRB is available on death estate * Death time exemptions * Tax at 40% During the lifetime of the trust Life interest created during lifetime OR by will Inheritance tax No IHT payable as: * No periodic charges * No exit charges Capital gains tax a) Property remains in the trust No CGT payable by the life tenant as: * Life tenant not deemed to own property for CGT purposes b) Property is sold by trustee Trustee's actual chargeable disposal rules apply * Calculate gain * Minus trustee's AE (PS5,500) * Reduced gain x 0.28 a) Trustees - must pay income tax on any trust income a) Non-Dividend income - 20% tax Income tax b) Dividend income - 10% tax b) Life tenants - Must pay personal income tax on trust income once it has been paid out relative to their own income tax position a) If have overpaid a? Will claim a rebate b) If have underpaid a? Will pay more