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Top Tip – Taxation of a Discretionary Trust – CII AF1

Top Tip – Taxation of a Discretionary Trust – CII AF1

Written by Jane Alford

Top Tip for Studying for Your CII ExamsOne of our students currently going through the AF1 virtual tuition with me has been getting to grips with trust taxation this week.

I thought I would share one of the examples I used with him to see if it would help anyone else studying hard for this exam.

It’s an example of working through the periodic charge and the exit charge on a discretionary trust.

Kim set up a discretionary trust in June 2002 with £700,000 and in June 2012 its value was £900,000.  What was the periodic charge at year 10?

£900,000 – £325,000 (2012/13 nil rate band) = £575,000 x 30% x 20% = £34,500

£34,500/£900,000 x 100 = 3.8% (the effective rate)

The periodic charge is therefore £900,000 x 3.8% = £34,200.

If the trustees make a distribution of the total trust fund in the 11th year and the value of the fund is now £920,000 we now need to work out the exit charge.

£920,000 x 4/40 (the number of 3 month periods since year 10) = £92,000 x 3.8% (the effective rate at year 10).

The exit charge is therefore £3,496.

Hope it helps!