Top Tip – Taxation of a Discretionary Trust – CII AF1
Written by Jane Alford
One 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!