#13767 - Worked Answers Dealing With Income - Private Client

X dies in Dec 2009 and leaves 200,000 to T’s to hold for such of his Grandchildren (GC) as reach 25. The accumulation period for the trust is 21 years from the death.

• s31 applies but during accumulation period it is amended in 2 ways

  • The right to income at 18 is removed; instead, T’s have discretion until each B’s interest is vested

  • T’s have absolute discretion to apply the income from each child’s contingent share of the capital for the benefit of any one of the B’s [who is yet to attain a vested interest in capital]

First GC turns 25 31 July 2019 (so the class closes at that point)

• There are 3 other GC in the class; X (9) Y (7) and Z(1)

1. How will the accumulation period end?

21 years after creation – December 2030

2. How old will each beneficiary be at the end of the Acc period?

Dec 2030; X will be 21, Y will be 19 and Z will be 13

3. When the T’s can no longer Acc, what will they do with the income? AND What choices do they have?

When T’s can no longer accumulate income, they will have to pay it out. The power to switch income between B’s is limited to the accumulation period, so after the accumulation period ends…

- s31 TA 1925 will apply and EACH B WILL HAVE A RIGHT TO THE INCOME FROM THEIR RESPECTIVE SHARE.

4. If the T’s take no special steps, for how long will they be able to accumulate income for Z?

S31 applies to the settlement so the T’s have an extra power to accumulate income for Z… After the Acc period ends they can accumulate his share of the income while he is under 19. This means that they can accumulate his income from the end of the Acc period in Dec 2030 until his 18^th birthday (Nov 2035)

5. If the income of the settlement is large and the B’ have no need of income, the T’s may decide that they prefer to accumulate it…

> are there any income tax reasons for the T’s to consider exercising their power to give the B’s income?

T’s should consider exercising their power to give B’s income BECAUSE: (its tax efficient!)

• Income which is accumulated is liable to the trust rate of income tax (37.5% on dividends and 45% on all other income in excess of the basic rate; 1000) B’s can only recover income tax on income applied for THEIR benefit. The B’s are likely to be basic rate or non-tax payer (given that they are young) so there will be an advantage to paying out income rather than accumulating it. – They could put it into a bank account or something…

• Of course, T’s can CHOOSE to pay out income without giving B’s a right to it. However, if they decide to pay it out, there may be advantages to giving B’s a right to it…

  Right to Income

• If T’s give the B’s a right to the income (which they can do on a revocable basis, thus reserving the flexibility to alter entitlement) the T’s will be liable only for basic rate tax and, if receiving dividends or interest will have no further liability, (lessening the administrative burden on the trust)

• The B will be treated as receiving dividends and interest; if the B is a basic rate tax payer the B will have no further tax liability.

• If the B is not a tax payer at all, he will be able to reclaim the tax on the interest but not on the Dividends as the tax credit is irrevocable. ( this being a disadvantage to such an arrangement)

No Right to Income – this is what we are likely to be examined on (to do calculations)

The B’s will be treated as receiving a new source of income, trust income, and will be treated as having a 45% tax credit. If the income includes dividends, T’s will have the benefit of the 10% tax credit and will pay an extra 27.5%. The T’s then have to account to the Revenue for the short fall which is administratively burdensome ( pain in the ass) and a possible trap if they have no liquid funds available.

The same problem arises with the first 10,000 of trust income on which T’s pay only the basic rate tax. The B claims 45% tax credit and the T’s have to account to the Revenue for the balance.

Gee – for understanding: Beneficairy will claim back Full AMOUNT OF TRUST income… on the basis that the Revenue will not have accounted for how much was paid.. this will mean that the T’s who have set an amount a side for only the basic rate will be met with a tax burden they cannot afford. They will then have to account to the Revenue and resolve this… it may also be that they did not put enough money away to begin with.

IHTA s71A and 71D: lay down requirements for will trusts for young people which attract privileged IHT treatment

IHTA 49A: sets out the requirements for IPDI

1. By his Will A leaves his property to his son absolutely, contingent on attaining 18, failing which it is to go to A’s sister. The son is 2 when A dies.

The settlement provides that the trustees have power to apply the income for the son’s benefit and, to the extent that they do not, must accumulate it.

• There is a s32 power of advancement but no other powers to deal with capital.

1. The above is a BMT as requirements of 71A are satisfied

2. What happens if the son:

1. lives to 18,

He will take a vested interest in capital and there will be no charge to IHT s71B(2)(a)

2. dies aged 17

The deceased has provided his sister as a ‘fall back’ so she will take a vested interest in capital. AGAIN there will be no charge to IHT s71B(2)(b)

3. receives an advance of capital from the trustees under 18?

The T’s appoint capital to the son, he will take a vested interest in capital. – there will be no charge to IHT s71B (c)

2. B’s will settles property on his daughter contingent on reaching 21: till that age there is a power to accumulate income. Daughter is 2 at B’s death.

-> The settlement is NOT A BMT – the age in which it vests is too old – it may be a 71D

-> What sort of settlement is it for IHT purposes? Look at s71A (3) (a) and 71D(6)

- There will be no anniversary charges. There will be no exit charges on any appointment of capital while the daughter is under 18. After that date there will be exit charges on any appointment of capital to her before she reaches 21, and when she becomes entitled to capital at 21.

3. C dies intestate. He is survived by two children (minors). One of his children predeceased him leaving a son, who is now 6. Is the settlement a bereaved minor’s trust? Look at s71A (1)(a)

The settlement is a BMT. S71A(1)(a) specifically provides that the trusts arising on intestacy for the settlors issue are trusts for a Bereaved Minor. It is irrelevant that the grandchild is substituted.

4. E’s will leaves property to his children F and G contingent on reaching 18 with a substitutional gift to their own...