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The Taxation of Trusts Can Be Tricky – Part 2

The Taxation of Trusts Can Be Tricky – Part 2

In our recent article, we looked at the income tax position of the three main types of trust that can be examined in AF1, J02, R03, and potentially in R06 and AF5 as well. In this article, we consider the capital gains tax (CGT) and inheritance tax (IHT) treatment.

THIS ARTICLE IS RELEVANT TO EXAMINABLE TAX YEAR 2019/20.
Trusts are a valuable financial planning tool. Here, we consider the CGT and IHT treatment of trusts. Click To Tweet

 

Bare Trust
Trustees act as nominees Beneficiary is absolutely entitled to the assets – or would be if they were aged 18
Interest in Possession Trust
Where one or more beneficiaries has the right to the income arising in the trust
Discretionary Trusts
The trustees have discretion as to who gets income and capital
CGT
Gift into the trust is a disposal.

Gains are treated as those of the beneficiary.

They can use their own full CGT annual exempt amount.

Gains above this will be charged at their marginal rate.

Any transfer to them by the trustees is not a disposal.
Gift into trust is a disposal.

On a pre-22/3/06 trusts, holdover relief applies but only on business assets.

On post-22/03/06 trusts, holdover relief applies on any asset (except if settlor interested, in which case no hold over relief).

Trust has an annual exempt amount of 1/2 the standard amount – reduced where settlor has set up more than 1 trust, down to a minimum of 1/5.

Rate of CGT is 20% (unless property, which is not the principal private residence of the beneficiary, in which case 28%).

Disposals made by trustees to beneficiaries are chargeable (subject to any holdover relief claim).
Gift into trust is a disposal.

Holdover relief can be claimed on any asset (unless settlor interested).

Trust has an annual exempt amount of 1/2 the standard amount – reduced where the settlor has set up more than 1 trust, down to a minimum of 1/5.

Rate of CGT is 20% (unless property, which is not the principal private residence of the beneficiary, in which case 28%).

Disposals made by trustees to beneficiaries are chargeable (subject to any holdover relief claim).
IHT
Gift into the trust is a PET.

Assets will form part of the beneficiary’s estate on death.
On pre-22/3/06 trusts, the gift was a PET.

Life tenant had interest in possession, so trust assets in their estate on death.

If a beneficiary was changed this was a PET.

On post-22/3/06 trusts, the gift into trust is a chargeable lifetime transfer.
Periodic tax charge on trust value every 10 years – maximum rate of 6%
Exit charge on capital distributions – maximum rate of 6% with x/40 rule.

Assets do not form part of the beneficiary’s estate on death.
Gift into the trust is a chargeable lifetime transfer.

IHT paid at 20% on amount over the nil rate band.

Periodic tax charge on trust value every 10 years – maximum rate 6%
Exit charge on capital distributions – maximum rate of 6% with x/40 rule.

Assets do not form part of the beneficiary’s estate on death.

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Alternatively, you can download the taster for AF1AF5, J02, or R06 if you’re preparing for one of those exams.