#16659 - Taxation Of Trusts

TAXATION OF TRUSTS

INHERITANCE TAX

= falls within relevant property regime (‘RPR’)

Type of Trust/ Settlement	Created before 22 March 2006	Created on or after 22 March 2006
Settlements with an interest in possession	Creation inter vivos: Transfer = PET Only chargeable if the settlor dies within 7 years If it became chargeable, the tax would be paid by the trustees out of the trust fund	Creation on death: The assets in the trust are treated as part of the property of the deceased IHT is charged at the death rate Tax would be paid by the PRs out of the estate	Creation of any lifetime trust = LCT (exception: disabled trusts – s.89 IHTA 1984) All lifetime trusts are within the relevant property regime On Creation: Chargeable transfer whether trust is created inter vivos or on death an inter vivos transfer to a discretionary trust will be a LCT chargeable to IHT at the lifetime rate (20%) where the discretionary trust is created on death, IHT will be charged at the death rate (40%) The tax will be paid by the trustees or by the settlor, depending on the terms of the trust During the existence of the trust: An anniversary charge is levied on the “relevant property” (i.e. the capital plus any accumulated income) in the fund on every tenth anniversary of the creation of the trust rate will be no more than 30% of 20% (i.e. 6%) An exit charge is made whenever property leaves the settlement – usually occurs when trust property is appointed to a beneficiary, or when an interest in possession arises in part of the trust property tax is charged on the fall in value of the fund at the trust rate – rate will be no more than 6% no exit charge within 3 months of creation or 3 months after an anniversary charge
Implications for the beneficiary with interest in possession: After the creation of the trust, the beneficiary with the interest in possession will be treated for IHT as if they owned the underlying capital If the trust terminated during the lifetime of the beneficiary with the interest in possession or they ceased to be entitled to it, IHT rules treat the beneficiary as if they had made a gift – the transfer would be a transfer of value made by that beneficiary On termination on death of the life tenant: The trust assets will be treated as part of the property of the deceased life tenant and aggregated with the assets they own personally IHT will be charged at the death rate The trustees are liable for paying the tax on the value attributable to the trust fund
Settlements with no interest in possession	On Creation: Chargeable transfer whether trust is created inter vivos or on death an inter vivos transfer to a discretionary trust will be a LCT chargeable to IHT at the lifetime rate (20%) where the discretionary trust is created on death, IHT will be charged at the death rate (40%) The tax will be paid by the trustees or by the settlor, depending on the terms of the trust During the existence of the trust: An anniversary charge is levied on the “relevant property” (i.e. the capital plus any accumulated income) in the fund on every tenth anniversary of the creation of the trust – rate will be no more than 30% of 20% (i.e. 6%) An exit charge is made whenever property leaves the settlement – usually occurs when trust property is appointed to a beneficiary, or when an interest in possession arises in part of the trust property Tax is charged on the fall in value of the fund at the trust rate – rate will be no more than 6% no exit charge within 3 months of creation or 3 months after an anniversary charge
Special or privileged trusts	Accumulation and Maintenance (‘A&M’) Trusts PET Certain trusts for young persons (< age 25) called A&M trusts received special tax advantages if they satisfied the requirements of s.71 IHTA 1984 No new A&M trusts can be created after 22 March 2006 and existing A&M trusts lost their special tax advantages on 6 April 2008	Will Trusts On Creation: part of the transfer of value a deceased makes on death During the existence of the trust: Immediate post-death interest trusts If a beneficiary receives an interest in possession immediately on death, trust property is taxed as part of the beneficiary’s estate Settled property will be aggregated with the beneficiary’s own property when they die or when their interest terminates Trusts for bereaved minors and young people For a parent’s own child contingent upon reaching an age not greater than 25 Not subject to anniversary charges, provided the conditions in s.71A or s.71D IHTA 1984 are satisfied No exit charge if trust property is paid to the child on or before the age of 18 If trust property is paid to the child after 18 and before 25, there will be an exit charge calculated on the length of time property has remained in the settlement since the child’s 18^th birthday Trusts for disabled people – s.89 IHTA 1984 No anniversary or exit charges Beneficiary is treated as being beneficially entitled to trust assets Settled property will be aggregated with the disabled beneficiary’s own property when the beneficiary dies

Settlements with an interest in possession

Creation inter vivos:

Transfer = PET
Only chargeable if the settlor dies within 7 years
If it became chargeable, the tax would be paid by the trustees out of the trust fund

Creation on death:

The assets in the trust are treated as part of the property of the deceased
IHT is charged at the death rate
Tax would be paid by the PRs out of the estate

Creation of any lifetime trust = LCT
(exception: disabled trusts – s.89 IHTA 1984)
All lifetime trusts are within the relevant property regime

On Creation:

Chargeable transfer whether trust is created inter vivos or on death
- an inter vivos transfer to a discretionary trust will be a LCT chargeable to IHT at the lifetime rate (20%)
- where the discretionary trust is created on death, IHT will be charged at the death rate (40%)
The tax will be paid by the trustees or by the settlor, depending on the terms of the trust

During the existence of the trust:

An anniversary charge is levied on the “relevant property” (i.e. the capital plus any accumulated income) in the fund on every tenth anniversary of the creation of the trust
- rate will be no more than 30% of 20% (i.e. 6%)
An exit charge is made whenever property leaves the settlement – usually occurs when trust property is appointed to a beneficiary, or when an interest in possession arises in part of the trust property
- tax is charged on the fall in value of the fund at the trust rate – rate will be no more than 6%
- no exit charge within 3 months of creation or 3 months after an anniversary charge

Implications for the beneficiary with interest in possession:

After the creation of the trust, the beneficiary with the interest in possession will be treated for IHT as if they owned the underlying capital
If the trust terminated during the lifetime of the beneficiary with the interest in possession or they ceased to be entitled to it, IHT rules treat the beneficiary as if they had made a gift – the transfer would be a transfer of value made by that beneficiary

On termination on death of the life tenant:

The trust assets will be treated as part of the property of the deceased life tenant and aggregated with the assets they own personally
IHT will be charged at the death rate
The trustees are liable for paying the tax on the value attributable to the trust fund

Settlements with no interest in possession

On Creation:

Chargeable transfer whether trust is created inter vivos or on death
- an inter vivos transfer to a discretionary trust will be a LCT chargeable to IHT at the lifetime rate (20%)
- where the discretionary trust is created on death, IHT will be charged at the death rate (40%)
The tax will be paid by the trustees or by the settlor, depending on the terms of the trust

During the existence of the trust:

An anniversary charge is levied on the “relevant property” (i.e. the capital plus any accumulated income) in the fund on every tenth anniversary of the creation of the trust – rate will be no more than 30% of 20% (i.e. 6%)
An exit charge is made whenever property leaves the settlement – usually occurs when trust property is appointed to a beneficiary, or when an interest in possession arises in part of the trust property
- Tax is charged on the fall in value of the fund at the trust rate – rate will be no more than 6%
- no exit charge within 3 months of creation or 3 months after an anniversary charge

Special or privileged trusts

Accumulation and Maintenance (‘A&M’) Trusts

PET
Certain trusts for young persons (< age 25) called A&M trusts received special tax advantages if they satisfied the requirements of s.71 IHTA 1984
No new A&M trusts can be created after 22 March 2006 and existing A&M trusts lost their special tax advantages on 6 April 2008

Will Trusts

On Creation: part of the transfer of value a deceased makes on death

During the existence of the trust:

Immediate post-death interest trusts
- If a beneficiary receives an interest in possession immediately on death, trust property is taxed as part of the beneficiary’s estate
- Settled property will be aggregated with the beneficiary’s own property when they die or when their interest terminates
Trusts for bereaved minors and young people
- For a parent’s own child contingent upon reaching an age not greater than 25
- Not subject to anniversary charges, provided the conditions in s.71A or s.71D IHTA 1984 are satisfied
- No exit charge if trust property is paid to the child on or before the age of 18
- If trust property is paid to the child after 18 and before 25, there will be an exit charge calculated on the length of time property has remained in the settlement since the child’s 18^th birthday
Trusts for disabled people – s.89 IHTA 1984
- No anniversary or exit charges
- Beneficiary is treated as being beneficially entitled to trust assets
- Settled property will be aggregated with the disabled beneficiary’s own property when the beneficiary dies

CAPITAL GAINS TAX

Creation inter vivos An inter vivos transfer of assets to trustees will be a disposal and the settlor will be charged to CGT in the usual way – s.70 TCGA 1992	Creation on death If the trust is created on death, there will be no charge to CGT The trustees will receive the assets at their market value at death
Holdover relief may be available under s.165 TCGA 1992 (for business assets) or s.260 TCGA 1992 (on transfers chargeable to IHT) as when a transfer is made to a trust. During the life of the trust: any actual disposal by the trustees i.e. on a sale of assets, or a transfer of the trust fund or any part of it to a will be a disposal and the...

Creation inter vivos

An inter vivos transfer of assets to trustees will be a disposal and the settlor will be charged to CGT in the usual way – s.70 TCGA 1992

Creation on death

If the trust is created on death, there will be no charge to CGT
The trustees will receive the assets at their market value at death

Standard Rate

10%

Gains + Income > 34,500

20%

Holdover relief may be available under s.165 TCGA 1992 (for business assets) or s.260 TCGA 1992 (on transfers chargeable to IHT) as when a transfer is made to a trust.
During the life of the trust: any actual disposal by the trustees i.e. on a sale of assets, or a transfer of the trust fund or any part of it to a will be a disposal and the...

#16659 - Taxation Of Trusts - Private Client

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