R03_flashcards_section_eleven

Question 1

What is an interest in possession trust?

Answer 1

A trust where one or more beneficiaries have the right to the income arising from the trust

The beneficiary has an immediate and automatic right to the trust income.

Question 2

What Income Tax rates apply to trustees of IIP trusts?

Answer 2

• 20 percent on savings and other income
• 8.75 percent on dividends

Trustees pay basic rate only and have no personal allowance, PSA or dividend allowance.

Question 3

How are expenses treated in an IIP trust?

Answer 3

Expenses are deducted before distribution and set against income in the order of UK dividends, foreign dividends, savings income, then other income

This reduces the amount of income available to distribute.

Question 4

When is the settlor taxed instead of the trustees in an IIP trust?

Answer 4

When the settlor retains an interest

If settlor-interested, income is assessed on the settlor and they can reclaim tax from trustees.

Question 5

Is the gift into an IIP trust a disposal for CGT?

Answer 5

Yes

Gifts into trust are disposals for capital gains purposes.

Question 6

When is holdover relief available for an IIP trust gift?

Answer 6

Pre 22 March 2006 only for business assets, post 22 March 2006 for any asset unless settlor interested

Settlor interest blocks holdover relief.

Question 7

What CGT annual exemption applies to IIP trusts?

Answer 7

Half of the normal annual exempt amount

Trusts share one exempt amount, with a minimum of one fifth if multiple trusts.

Question 8

What happens for CGT when assets are appointed to a beneficiary from an IIP trust?

Answer 8

Holdover relief is available

This delays the gain to the beneficiary.

Question 9

How were pre 22 March 2006 IIP trusts treated for IHT on creation?

Answer 9

Gift into trust was a PET

If the donor survived seven years it became fully exempt.

Question 10

How are post 22 March 2006 IIP trusts treated for IHT?

Answer 10

Gift into trust is a chargeable lifetime transfer

They fall under the relevant property regime with periodic and exit charges.

Question 11

Is a life tenant’s IIP included in their estate on death?

Answer 11

Yes

The right to income is treated as part of their estate.

Question 12

How does the beneficiary pay tax on income they receive from an IIP trust?

Answer 12

They receive an R185 and add income to their own tax return

They can reclaim or pay additional tax depending on their marginal rate.

Question 13

What is a discretionary trust?

Answer 13

A trust where no beneficiary has an automatic right to income or capital

Trustees choose when and to whom income is paid.

Question 14

Do discretionary trust trustees receive any personal allowance?

Answer 14

No

All income is taxed without personal allowances, PSA or dividend allowance.

Question 15

What tax rate applies to discretionary trust trustees on dividend income above the £500 rule?

Answer 15

39.35 percent

This is the trust rate for dividends.

Question 16

What is the tax rate on other income for discretionary trust trustees?

Answer 16

45 percent

This applies once income exceeds the £500 standard rate band.

Question 17

What is the £500 rule for discretionary trusts?

Answer 17

The first £500 of income can be taxed at basic-rate if multiple trusts exist

The £500 band is split between trusts created by the same settlor with a minimum £100 per trust.

Question 18

How are trustee expenses treated in discretionary trusts?

Answer 18

They are allowable but grossed up and applied against dividend income first

Expenses reduce income before tax but are still charged at basic rate.

Question 19

What CGT annual exemption applies to discretionary trusts?

Answer 19

Half the standard annual exempt amount, shared across multiple trusts with minimum one fifth

Trustees need to share this between trusts created by the same settlor.

Question 20

What are the main IHT charges affecting discretionary trusts?

Answer 20

• 20 percent lifetime tax over nil rate band
• 10 year periodic charges up to 6 percent
• Exit charges up to 6 percent

These are the relevant property regime charges.

Question 21

What tax credit attaches to beneficiary distributions from discretionary trusts?

Answer 21

45 percent

Ensures that beneficiaries pay the correct tax by adjusting at their marginal rates.

Question 22

What was an A and M trust?

Answer 22

A special type of discretionary trust where beneficiaries became entitled to capital at a specified age

These were tax-favoured before 2006.

Question 23

Can new A and M trusts still be created?

Answer 23

No

They stopped being available from 22 March 2006.

Question 24

When did old A and M trusts lose their favourable tax treatment?

Answer 24

After 5 April 2008 unless amended

After this, they became relevant property trusts unless they met specific rules.

Question 25

What happens if an old A and M trust was amended to give entitlement at **age 18**?

Answer 25

It remains free from periodic and exit charges ## Footnote This preserved its original favourable treatment.

Question 26

What happens if an A and M trust was amended to give entitlement between ages **18 and 25**?

Answer 26

Exit charges apply after age 18 ## Footnote Periodic charges still do not apply.

Question 27

What happens if an A and M trust was left unchanged and pays capital after **age 25**?

Answer 27

It becomes a discretionary (relevant property) trust ## Footnote Periodic and exit charges then apply.

Question 28

When is an **offshore trust** subject to UK Income Tax?

Answer 28

When at least one trustee is UK resident ## Footnote UK trustees bring UK tax obligations.

Question 29

When are **beneficiaries taxed** on offshore trust distributions?

Answer 29

When receiving capital that represents accumulated income ## Footnote Anti avoidance rules attribute the income to beneficiaries.

Question 30

Are **offshore trusts** subject to UK CGT?

Answer 30

No, unless a UK resident trustee exists ## Footnote Full CGT applies only if trustees are UK resident.

Question 31

What is **excluded property** in an offshore trust?

Answer 31

Non UK assets settled by a non UK domiciled settlor ## Footnote These assets are exempt from UK IHT.

Question 32

How are offshore trusts treated for **IHT** when settled by a UK domiciled settlor?

Answer 32

Treated as transfers of value ## Footnote UK domiciled settlors face UK IHT on worldwide assets.

Question 33

What is **POAT**?

Answer 33

An Income Tax charge on individuals who continue to enjoy use of assets they previously gave away ## Footnote It prevents avoidance of gift with reservation rules.

Question 34

When does **POAT apply** on land or property?

Answer 34

When someone gives away land or accommodation but continues to benefit from it ## Footnote It charges income tax based on annual rental value.

Question 35

What types of **assets** does POAT apply to?

Answer 35

* Land including accommodation * Chattels * Intangible assets in settlements where settlor retains an interest ## Footnote It covers most personal use assets.

Question 36

What is the **£5,000 POAT exemption**?

Answer 36

No POAT is charged if the annual benefit value is below £5,000 ## Footnote Small benefits escape the charge.

Question 37

Can POAT be avoided by **paying for the benefit received**?

Answer 37

Yes ## Footnote Paying market value rent removes the taxable benefit.

Question 38

What is the **election to avoid POAT**?

Answer 38

Electing for the asset to fall under gift with reservation rules using form IHT500 ## Footnote This swaps Income Tax for possible IHT on death.

Question 39

Who does **POAT apply to**?

Answer 39

UK residents ## Footnote Non residents are outside scope.