Audley Financial Training

Audley Financial Training
AF1 Trusts 16/8/2019 Audley Financial Training

What we will cover Basics of a trust The main types of trusts Taxation of trusts Investment Bonds in Trusts Overseas Trusts The use of trusts in financial planning 16/8/2019 Audley Financial Training

I want to make provision for my mentally handicapped daughter
I want to make a gift to my son but I’m afraid that he will gamble it all away I’ve got a big life policy and I want to ensure this goes straight to my children I want to make provision for my mentally handicapped daughter I want to ensure that if I die before my husband he will be financially secure but the house and capital will go to my children and not his We want to make provision for our grandchildren How can I influence the way my estate is distributed and used after I die? 16/8/2019 Audley Financial Training

It now belongs to me and I can do what I want with it
This belongs to me and I can do what I want with it Legal Rights and Equitable Rights 16/8/2019 Audley Financial Training

Settlor Trustee Beneficiary(ies) B C A Equitable Rights Legal and Equitable Rights Legal Rights 16/8/2019 Audley Financial Training

The three parties to a trust
The settlor Decides what type of trust Gifts the property to the trust Appoints trustees Trustees The legal owners of the property Administer the trust property in accordance with the trust deed The beneficiary(ies) Those who can benefit from the trust 16/8/2019 Audley Financial Training

Multiple Personalities
A settlor can be a trustee but cannot normally be a beneficiary A trustee can be a beneficiary but must not treat themselves more favourably than other beneficiaries Multiple Personalities 16/8/2019 Audley Financial Training

Beneficiary’s rights Income rights. The right to receive income from the trust “Enjoyment” rights. The right to enjoy some benefit such as living in a house rent free. Right to be “maintained” Right to capital from the trust. This may be an absolute right It could be conditional, e.g on reaching a set age It could be at the discretion of the trustees 16/8/2019 Audley Financial Training

How to set up a trust The main two ways are: By a deed A written declaration, signed and witnessed that sets up the trust. Usually comes into effect immediately. Through a will The will states that on the death of the individual, property is passed into a trust. The trust comes into effect on their death Other methods are available! 16/8/2019 Audley Financial Training

Interest in Possession
Bare trusts Interest in Possession Discretionary Trusts set up in life 16/8/2019 Audley Financial Training

Bare Trusts aka Absolute Trusts
I want the property! The beneficiary, if over 18, can demand the trustees hand over the property at any time. The trustees cannot take away their right to the property 16/8/2019 Audley Financial Training

Interest in Possession Trusts
We will but who gets the capital will depend on the trust deed You must pay me any income from the trust 16/8/2019 Audley Financial Training

Flexible Power of Appointment Trust
But I might want to change this in the future so I have potential beneficiaries The trust has default beneficiaries who are are named I can take someone from the potential list and add them to the default one Default Beneficiaries Named Potential Beneficiaries Listed by family realtionship 16/8/2019 Audley Financial Training

Lifetime Interest Trust
It’s my money! PET Income Trust Capital 16/8/2019 Audley Financial Training

Discretionary trusts Here we have a group of potential beneficiaries but the trustees have total discretion over who gets what and when 16/8/2019 Audley Financial Training

It’s all about the beneficiaries’ rights
Bare/Absolute Trust. Beneficiaries can claim the assets whenever they want Interest in Possession Trust Named beneficiaries have a right to income or other benefit. Right to capital will depend on trust deed. Discretionary Trust No beneficiary has a right to income or capital 16/8/2019 Audley Financial Training

Trusts set up in a will Rather than give an outright legacy it may be preferable to pass the gift into a trust. The trust comes into effect on the death of the donor The executors are normally the trustees The main reasons to set one up are control and IHT mitigation You can set up an bare/absolute trust or a Discretionary Trust There are three trusts that can only be set up through a will. Immediate Post Death Interest (IPDI) Trust Trust for Bereaved Minors 18-25 trust 16/8/2019 Audley Financial Training

Immediate Post Death Interest Trust
It’s my house! Legacy Right to live in the house IPDI Trust House 16/8/2019 Audley Financial Training

Bereaved Minor Trust/18-25 trust
Can only be set up by a parent or step-parent of a minor child. It cannot be used by a grandparent or any other relative It must give the child an absolute right to the property on reaching 18 And that can be a potential problem An alternative is the trust where the trustees can pass the property over at any time between their 18th and 25th birthday 16/8/2019 Audley Financial Training

Discretionary Will Trusts
The deceased cannot be a trustee but can have some influence on the trustees. This is done by writing a letter of intent This is not binding on the trustees but will normally be followed 16/8/2019 Audley Financial Training

Married Women’s Property Act trust
A life policy must be taken out by a man or woman on their own life The policy must be for the benefit of a spouse or civil partner or children of the assured The Act does not have to be mentioned and the words used do not have to expressly declare a trust Usually set up by a “tick box” on the proposal form 16/8/2019 Audley Financial Training

MWPA Benefeciaries Unnamed spouse spouse at the date of death Named spouse a subsequent divorce will not destroy the interest a court may vary the terms of the trust during a divorce Children excludes stepchildren and grandchildren but includes illegitimate and adopted children Child beneficiaries may be named or unnamed can be restricted to children of an existing marriage their interest can be contingent on attaining some age 16/8/2019 Audley Financial Training

Charitable Trusts Set up under the Charities Act 2006 13 possible objectives Lifetime gifts are exempt Legacies are exempt and could reduce IHT rate to 36% Trust income and gains free of income and Capital gains tax 16/8/2019 Audley Financial Training

Trusts legal issues 16/8/2019 Audley Financial Training

The three certainties of a trust
Certainty of words Certainty of subject Certainty of object 16/8/2019 Audley Financial Training

Trustees Choosing trustees How they are appointed How they can be changed Their duties Their powers including their investment powers Their powers to delegate Trust registration Service 16/8/2019 Audley Financial Training

Choosing Trustees Anyone over 18 and sane can be a trustee How many? Professional or lay? What will trustees be expected to do? What age will they be when they will be required to make crucial decisions? 16/8/2019 Audley Financial Training

Appointment of trustees
Usually appointed by settlor in trust deed Further trustees may be added by trustees or an appointer depending on trust deed. Trustees can be replaced if They are minors They die They are unfit or become incapable of acting They become disqualified They are out of the UK for more than 12 months They wish to be discharged 16/8/2019 Audley Financial Training

Death of trustee If the last surviving trustee dies their powers will be taken over by their executors Who can appoint another trustee No trust will ever fail because of a lack of trustee The court will appoint a trustee in those circumstances 16/8/2019 Audley Financial Training

Powers of trustees What they can legally do Buy & sell investments and give receipt for property passed to them Insure property Settle debts or renegotiate their liabilities Maintain minors by advancing money for their maintenance, education or benefit Advance capital to a beneficiary before the deed states they will become absolutely entitled to it 16/8/2019 Audley Financial Training

Duties of trustees: what they must do
To act in the best interest of the beneficiaries To exercise care in the management of the trust To invest any cash, unless it is to be paid out To invest in accordance with the trust deed, or general trust law (Trustee Act 2000) To hold the title documents to any trust property To take into account the tax position of the trust and its beneficiaries To keep proper accounts and produce them to the beneficiaries if required 16/8/2019 Audley Financial Training

Investment Powers of trustees
A default power to invest in the same way as outright owners can be restricted by the trust deed Must consider the suitability of the investments and the need for diversification Keep investments under review and vary them if appropriate Must obtain and consider proper advice when making and reviewing investments unless considered unnecessary or inappropriate 16/8/2019 Audley Financial Training

Delegation of Powers Trustees powers to delegate Under Trustee Act 2000 can appoint agents nominees Custodians But cannot delegate Distribution of trust assets How fees are dealt with Appointment of new trustees Delegation of trustees’ powers 16/8/2019 Audley Financial Training

Action against trustees
Breach of Trust Action against trustees If trustees do something outside their powers, or fail to do something the trust requires them to do A beneficiary can take legal action against trustees and if they are guilty of a breach they can be liable to compensate the beneficiaries for loss caused by the breach a court can relieve them of liability if they have acted honestly and reasonably Provided the trustees exercise their duty of care they will not be liable for loss 16/8/2019 Audley Financial Training

Perpetuities and Accumulations
A charitable trust can continue indefinitely All other trusts have a limited life Current law is that all new trusts have a maximum life of 125 years A trust can accumulate income for its whole lifetime A charitable trust can only accumulate income for a maximum of 21 years 16/8/2019 Audley Financial Training

Saunders v Vautier Allows beneficiaries to demand trustees wind up the trust and distribute assets Provided all beneficiaries can be identified All are over 18 and sane And they all agree 16/8/2019 Audley Financial Training

Trust Registration Most UK trusts must now be registered with HMRC All UK express trusts, that is deliberately created by a settlor All non-UK trusts which receive UK income or have UK assets on which the trustees have incurred a UK tax liability in a given tax year. Tax includes income tax, CGT, IHT, Stamp Duty Land Tax, Stamp duty Reserve Tax or Stamp Duty 16/8/2019 Audley Financial Training

Trusts that don’t need to register
Bare Trusts Trusts with no UK tax liability or the liability is less than £100 on bank/BS interest (equates to £500 gross interest) Trusts with non income producing assets, e.g, Insurance Bonds Until there is a chargeable event and the settlor is dead or non-UK resident. OR a new gift occurs that results in the trustees paying a CLT A periodic or exit charge occurs 16/8/2019 Audley Financial Training

How and what to register
One trustee is nominated as the “principal acting trustee” Information required: Trust: Name, date it was established, where the trust is registered Trustees, settlors and protector: Name, DOB, NINO and telephone number. Individual beneficiaries: Name, DOB, NINO Unspecified beneficiaries; Description used in the trust Details of the assets in the trust 16/8/2019 Audley Financial Training

When to register For a new trust: October 5 in the following tax year For an existing trust where there is a tax liability, by 31 January in the following tax year Failure to register by the deadline will incur a penalty. 16/8/2019 Audley Financial Training

Trust taxation: 16/8/2019 Audley Financial Training

Trust taxation - Overview
In a Bare trust all liability falls directly on the beneficiary All other trusts, the liability falls on the trustees who are responsible for declaring and paying tax Trustees must register for self-assessment. Tax is payable in two payments on account, 31 January in the year of assessment and 31 July in the following year. With balancing payment on the following 31 January. If trustees pay money to a beneficiary they must prepare a R185 statement showing the gross and net amount and tax paid by trustees 16/8/2019 Audley Financial Training

Lifetime Gift would be a transfer for IHT purposes and could incur CGT Income paid to a beneficiary will normally be taxable in the hands of the beneficiary but any tax paid by the trust can be offset by the recipient TRUST A gift made on death will use up part of the estate’s NRB CLICK We’ll start by considering when tax will arise in dealing with a trust A lifetime gift into a trust is a transfer CLICK for IHT purposes and could incur CGT A gift made on death CLICK will use up part of the estate’s NRB Income Tax and CGT CLICK will be payable on the trust’s investments Income paid to a beneficiary CLICK will be taxable in the hands of the beneficiary but any tax paid by the trust can be offset by the recipent Income tax and CGT will be payable on the trust’s investments 16/8/2019 Audley Financial Training

Trusts and IHT For IHT purposes trusts are split into two types
Owned by the beneficiary for IHT purposes No one owns it for IHT purposes Non relevant Property Trusts Relevant Property Trusts Bare Trusts IIP and Discretionary Trusts 16/8/2019 Audley Financial Training

Taxation of a Bare trust
Lifetime gifts are PETS Liability for tax on any income will fall on the beneficiary at their normal rates Beneficiary can use their PSA and dividend allowance Beneficiary will also be liable for CGT and can use their full annual allowance On the death of the beneficiary the trust property is part of their estate 16/8/2019 Audley Financial Training

Income tax: IIP and Discretionary Trusts
Trustees are responsible for paying the tax They must register for self assessment They have no PA & cannot use the PSA or DA For IIP income is taxed at basic rate (7.5% & 20%) For DT First £1,000 is taxed as basic rate. All other income is taxed at additional rate (38.1% & 45%) 16/8/2019 Audley Financial Training

CGT: IIP & DT The rules are the same for both trusts
Rate is always 20% & 28% for residential property Only 50% of the annual exemption (£6,000) is available Holdover relief can be claimed for property going in and out of the trust If more than one trust is set up this is split to a minimum of £1,200 16/8/2019 Audley Financial Training

Holdover relief property in
If we don’t agree she will have to pay CGT and the acquisition price when we come to sell it will be £100,000. If we agree the donor will not pay CGT but the acquisition price when we come to sell will be £20,000 I have a share portfolio worth £100,000 that was acquired for £20,000 Rather than pay CGT I can ask the trustees to accept it at the acquisition price of £20,000 Here’s how it works I want to make a gift of an asset of £100,000. The gain is £80,000 so if I pass it on as a gift I am liable to CGT But if I give it into a trust I can ask the trustees to use holdover relief. If the trustees don’t agree the donor will have to pay the CGT. The trustees will have deemed to acquire it at £100k which they will use as the base price when they sell or dispose it But if they agree the donor won’t pay CGT but the acquisition price when the trustees sell it will be £20,000 16/8/2019 Audley Financial Training

Holdover relief Gift from trust
We ask the recipient if they will agree to use holdover relief. This is accepted so we don’t pay tax and the asset is passed to the beneficiary with a “gain” of £180,000. This is only payable when they dispose of the asset They can do this in stages using their full annual exemption They may only need to pay We agreed to use holdover relief so the acquisition price is £20,000 15 years later it is worth £200,000 and we plan to give this to a beneficiary. The gain would be £180,000 and after annual exemption we would pay tax at 20% Here’s how it works I want to make a gift of an asset of £100,000. The gain is £80,000 so if I pass it on as a gift I am liable to CGT But if I give it into a trust I can ask the trustees to use holdover relief. If the trustees don’t agree the donor will have to pay the CGT. The trustees will have deemed to acquire it at £100k which they will use as the base price when they sell or dispose it But if they agree the donor won’t pay CGT but the acquisition price when the trustees sell it will be £20,000 16/8/2019 Audley Financial Training

Income Tax IIP trusts The trust has no personal allowance It has no PSA or Dividend Allowance All income is taxed is at basic rate (20% or 7.5%) As interest & Dividends are paid gross, the trustees must pay tax but this can be avoided if the income is mandated (paid directly) to the beneficiary 16/8/2019 Audley Financial Training

Taxation of Income in an IIP trust
£10,000 interest Trust liable for £2,000 tax Pays beneficiary £8,000 plus tax credit of £2,000 £10,000 dividend Trust liable for £750 tax Pays beneficiary £9,250 plus tax credit of £750 16/8/2019 Audley Financial Training

Taxation of Income in an IIP trust Mandating Income Interest of £10,000 paid direct to beneficiary £10,000 interest Trust Dividend of £10,000 paid direct to beneficiary £10,000 dividend 16/8/2019 Audley Financial Training

Beneficiary’s income tax liability
Trust pays £8,000 interest plus £2,000 tax credit Trust pays £9,250 dividend plus £750 tax credit Beneficiary puts £10,000 in savings column Beneficiary puts £10,000 in dividend column Beneficiary can use dividend allowance and taxed then at their rates Tax credit of £750 can be offset Taxed on beneficiary on their rates. Can use PSA and starting rate Tax credit of £2,000 can be offset 16/8/2019 Audley Financial Training

Paying a beneficiary Form R185 Gross payment Tax credit Net payment £5,000 £1,000 £4,000 16/8/2019 Audley Financial Training

Basic rate tax payer Savings Dividend £10,000 £1,000 £9,000 @ 0% = £0 @20% =£1,800 £2,000 £8,000 @ 0% = £0 @7.5% = £600 Less tax credit £750 Tax refund £200 £150 16/8/2019 Audley Financial Training

Higher rate tax payer Savings Dividend £10,000 £500 £9,500 @ 0% = £0 @40% =£3,800 £2,000 £8,000 @ 0% = £0 @32.5% = £2,600 Less tax credit £750 Tax payable £1,800 £1,850 16/8/2019 Audley Financial Training

Income tax on a discretionary/accumulation trust
As with IIP, the trust is a legal entity Trustees are liable for the tax But the rates of tax are different The tax treatment of the beneficiary’s income is also different 16/8/2019 Audley Financial Training

Taxation of income received by the trust
First £1,000 taxed at 7.5% or 20% Priority order is non-savings, savings, dividend If more than one trust this is split to a minimum of £200 Then all income taxed at Standard Rate for Trusts (RAT) 38.1% for dividends & 45% for all other income. 16/8/2019 Audley Financial Training

Interest income Trust receives £5,000 interest Trust has £3,000
First £1,000 20% 45% Trust has £3,000 16/8/2019 Audley Financial Training

Interest income After first £1,000
Trust receives £2,000 interest Pays £900 in tax Has £1,100 16/8/2019 Audley Financial Training

Disc trust Dividend Income (accumulation)
Receives £1,000 dividend income Pays £381 in tax Trust has £619 16/8/2019 Audley Financial Training

Discretionary trust income paid out
Trustees must pay all income to a beneficiary with a 45% tax credit. Beneficiary receives it as Trust Income which is classed as non-savings income. Cannot use PSA or Dividend Allowance 16/8/2019 Audley Financial Training

Paying out interest Trust receives £1,000 interest
Liable for £450 in tax Sends R185 to beneficiary showing £550 paid with £450 tax deducted 16/8/2019 Audley Financial Training

Paying out dividend Trust receives £1,000 dividend
Liable for £450 in tax Sends R185 to beneficiary showing £550 paid with £450 tax deducted 16/8/2019 Audley Financial Training

Tax pool OUT IN Tax 7.5% Tax 20% Tax 38.1% Tax payable at 45% All 45% tax credits 16/8/2019 Audley Financial Training

Tax pool Discretionary Trusts
Dividend £10,000 £10,000 payment with tax credit of £4,500 £5,000 payment with £2,250 tax credit As we have seen Income received by a discretionary trust, after the initial £1,000, is taxed at either 38.1% or 45% However when income is paid from the trust the trustees must pay it with a 45% tax credit The tax liability is placed into the tax pool CLICK and this is used to fund the 45% credit. In the first payment CLICK a dividend of £10,000 has been received on which the trustees incurred a liability of £3,810 For simplicity I’m ignoring the £1,000 basic rate This is placed in the tax pool CLICK They decide to make a £5,000 income payment to a beneficiary CLICK so must include a £2,250 tax credit This can be covered by the amount in the tax pool CLICK so this reduces to £1,590 If this was the only transaction in the tax year the pool would have a credit of £1,590 and could carry this forward We’ll now rest the position CLICK to disappear. The trustees now decide to make a £10,000 payment CLICK and this has a tax credit of £4,500 This is more than the money in the tax pool so at the end of the tax year the pool has a debit balance of £690 which is payable to HMRC (£690) £1,590 £3,810 16/8/2019 Audley Financial Training

Trust income v Dividend income
Non-savings £4,000 Less tax credit £4,500 (£500) Received from trust £5,500 Net Payment £6,000 Dividend £10,000 £2,000 £8,000 @ 0% = £0 @ 32.5% = £2,600 Net Payment £7,400 16/8/2019 Audley Financial Training

Trusts for the vulnerable
Trust assets must only be capable of being used to benefit the nominated person All income must be used for them Capital can be advanced to other beneficiaries up to the lesser of £3,000 or 3% of the assets Election for VP is irrevocable Trustees work out their liability and the liability of the VP The trustees claim the difference 16/8/2019 Audley Financial Training

Settlor interested trusts
Special tax rules apply if the settlor or their spouse can benefit from the trust. The whole of the trust income is taxable in the hands of the settlor even if this is not paid to them If a discretionary trust, the trustees pay RAT. Settlor is taxed on their own circumstances but must pay any refund from HMRC to the trustees CGT assessed on trustees 16/8/2019 Audley Financial Training

Minor unmarried children
Usual £100 parental income rule applies Father sets up DT and gross income of £5,000 is paid to daughter who is 24 and son aged 13 Each receives £2,750 plus £2,250 tax credit. Provided daughter is not an additional rate tax payer she can reclaim part of the tax credit Although son is a non tax payer the income is taxed as his father’s. He is a higher rate tax payer so can only reclaim 5% of the gross amount 16/8/2019 Audley Financial Training

Why trustees love Investment Bonds
One bond can hold a range of funds thereby fulfilling the requirement to have diversification A tax liability only arises when a Chargeable Event (CE) occurs No income is received so if no CE occurs there is no need to complete a tax return The trustees can pass any tax liabilities to the beneficiary 16/8/2019 Audley Financial Training

Who pays the tax? IIP and Discretionary Trust Bare Trust
Order of priority Beneficiary is liable IIP and Discretionary Trust Bare Trust 16/8/2019 Audley Financial Training

Order of liability on chargeable event
Is settlor alive and UK resident in tax year CE occurred? Gain is assessed on them on their own income and they can use top slicing If settlor dead (or non UK resident) are there UK trustees? Gain is assessed on them. First £1,000 at 20%, excess at 45% but credit given for 20% within fund No UK trustees? Beneficiaries liable at their marginal rates but cannot use top slicing 16/8/2019 Audley Financial Training

In practice The settlor is alive and a higher rate tax payer. 20% = £10,000 A CE occurs with a gain of £50,000, using top slicing a gain of £5,000 The settlor is dead but there is one UK trustee 25% = £12,250 No UK trustee. Two beneficiaries both have other income, £10,000 short of the HRT 0% 20% = £3,000 16/8/2019 Audley Financial Training

Dead Settlor Trick If the bond was placed into a trust before 17th March 1998 AND the settlor died before that date, no one has a tax liability Fred put an IB into a DT in 1990 and died in 1997 In 2018 the trustees decide to wind up the trust and distribute the proceeds Neither trustees nor beneficiaries will have a tax liability 16/8/2019 Audley Financial Training

How to avoid tax complications
Investment Bond in trust Trustees assign all or part to Beneficiary, not a CE Now out of trust and beneficiary will charged on their individual basis 16/8/2019 Audley Financial Training

Example Peter set up a Discretionary Trust for his grandchildren. £100,000 was invested in an onshore IB. Peter’s letter of intent stated that the trustees should pay for the grandchildren’s university fees Assigning as a gift is not a CE so the trustees have no tax liability Sophie is not a higher rate tax payer so does not have any tax liability In 2019 the trustees pay £20,000 to Peter’s grand-daughter Sophie. They do this by assigning segments and the gain on these is £10,000 16/8/2019 Audley Financial Training

Using an offshore bond 20 years ago Tamsin placed an offshore Bond with an initial investment of £100,000. in a UK based DT As it is an offshore Bond the whole gain is chargeable but Sam has no other income He could use his PA, £12,500, £5,000 0% starting rate and £1,000 PSA Today the Bond’s value is £360,000. Tamsin is still alive and one of the trustees. It is decided to assign segments worth £45,000 to Sam, her grandson on his 18th birthday. The gain is £32,500 £14,000 would be taxed at 20% giving him a liability of £2,800 16/8/2019 Audley Financial Training

What are TME? Income expenses incurred by trustees in running the trust. Accountancy and legal fees. Fees for financial advice. Not costs of insurance, mortgage interest for real property Cannot be incurred by bare trusts Trustees may incur expenses in running a trust. These could be accountancy and legal fees If a trust has property investments it will incur various expenses such as insurance and mortgage interest. Thess are not TME but are simply deducted from the rental income to get the net amount Bare trusts cannot incur TME. The other two types of trusts (IIP and DT) can but the way in which they aredealt with is different 16/8/2019 Audley Financial Training

An IIP trust receives £10,000 of interest and has incurred TME of £500
Less TME £500 Net £9,500 @20% = £1,900 Interest £10,000 Less tax £2,000 £8,000 Less TME £500 £7,500 Beneficiary gets £9,500 less £1,900 = £7,400 Let’s start with an IIP trust Here the trust has received £10,000 of interest and incurred TME of £500 CLICK The most obvious way to deal with this would seem to deduct the TME from the interest and then tax 20% This wrong CLICK The reason is that the beneficiary has a right to the income from an IIP trust so the trustees can’t use them to reduce their tax bill. Look at the R185. The trustees are saying the gross income is £10,000, they’ve paid tax of £1,900 but have somehow the net income is £7,400 With an IIP trust the trustees must still pay tax on the gross income CLICK so this figure is £2,000. It then seems logical to deduct the TME of £500 so we can pay the beneficiary £7,500. That is what the beneficiary will receive but when the R185 is completed, CLICK, the gross income is £10,000,the tax £2,000 and the net £7,500. But this is wrong because the net plus the tax must equal the gross R185 £10,000 Tax £1,900 Net £7,400 Gross Tax Net £10,000 £2,000 £7,500 16/8/2019 Audley Financial Training

The correct way! An IIP trust receives £10,000 of interest and has incurred TME of £500 Interest £10,000 Less tax £2,000 £8,000 Less TME £500 £7,500 £7,500 x £100/80 £9,375 Gross Tax Net £9,375 £1,875 £7,500 The last answer was on the right track but omitted the final step. CLICK We got to the £7,500 figure which is what will be paid to the beneficiary However this must be grossed up. As it is savings income it is grossed up by multiplying it CILCK by 100/80 to give £9,375 Click. This is placed in the gross income box of the R185 CLICK The ££7,500 is put in the net box so the tax credit is the difference between the two, £1,875. An alternative method is to gross up the TME, in this case £625 and deduct it from the £10,000 gross figure to give £9,375. The net figure remains £7,500 16/8/2019 Audley Financial Training

Trust Management Expenses IIP: trusts
For IIP trusts they reduce income payable to beneficiary. They do not reduce the tax payable by trustees The expenses should be grossed up If the trust has more than one type of income TME are offset first against dividend, then savings and last non-savings Let’s summarise the rules as they apply to IIP trusts They reduce the income paid to the beneficiary They do not reduce the tax payable by the trustees If the trust has more than one type ofincome 16/8/2019 Audley Financial Training

Interest £20,000 Dividend £10,000 Expenses £1,850 Beneficiary gets £10,000 dividend less £750 less £1,850 = £7,400 £7,400 x 100/92.5 = £8,000 Trustees pay 20% £4,000 7.5% £750 Total £4,750 Income Gross Tax Net Dividend £8,000 £600 £7,400 In this case we have Interest of £20,000, Dividends of £10,000 and TME of £1,850 The first step is to calculate the tax the trustees have to pay CLICK Remember TME will not reduce the trustees tax liability so they pay a total of £4,750. Next we calculate what can be paid to the beneficiary. Expenses must first be set against dividends CLICK so the trustees can pay £10,000 less the tax of £750 and the expenses of £1,850. Next CLICK We need to gross up the net dividend payment and as this is dividend it is grossed up by 100/92.5 to give £8,000 The R185 can now be completed. Gross dividends are £8,000 and net £7,400. The tax is £7,400. When completing their tax return they will pit £8,000 as gross dividend with a tax credit of £600 CLICK As no expenses were set against interest the gross interest is £20,000 with a tax credit of £4,000. £16,000 is paid to the beneficiary Interest £20,000 £4,000 £16,000 Total £23,400 16/8/2019 Audley Financial Training

TME & Discretionary Trusts
No one has a right to income from a discretionary trust, Instead they reduce the amount payable at RAT Again offset first against dividend, then savings and last non-savings 16/8/2019 Audley Financial Training

A discretionary trust receives £10,000 interest and incurs TME of £500
With TME No TME 20% £200.00 £500 x 100/80 = £625 20% £125.00 £10,000 less £1,000 less £625 = 45% £3,768.75 Total £4,093.75 20% £200 45% £4,050 £4,250 Here as with the IIP example the trust has received £10,000 of interest and incurred TME of £500 CLICK If there were no no TME then the calculation would be 20p and 45p. CLICK With TME the first £1,000 is still taxed at 20% but the TME are grossed up to £625 and these are taxed at 20% The amount chargeable at RAT is therefore £8,375 which is £10,000 less £1,000, less the grossed up TME This is then charged at 45% to give £3, so the trustees liability is £4,093.75 The principle is that TME reduce the amount of income that is liable to tax at the special rate for trusts 16/8/2019 Audley Financial Training

Dividends Gross up TME £1,850 x 100/92.5 = £2,000 Interest £20,000 Dividend £10,000 Expenses £1,850 £10,000 less £2,000 = £8,000 Interest 20% = £200 45% = £8,550 Total £8,750 7.5% = £150 38.1% = £3,048 Total £3,198 Next we’ll look at an example of a trust that receives both interest and dividends and we’ll use the same figures as in the IIP example Where there is more than one type of income the first £1,000 is applied to savings income CLICK sp £1,000 is taxed at 20% with the remaining £19,000 being taxed at 45% to give a total of £8,750 TME are first set against dividend income and these must be grossed up CLICK. As it’s dividends we gross up by 100/92.5 to give £2,000 CLICK this means that the first £2,000 of dividend income will be taxed at 7.5% and the remaining £8,000 at 38/1% CLICK the trustees final tax bill will be £11,948. This is the figure that will enter the tax pool: tax after expenses Interest £8,750 Dividends £3,198 Total £11,948 16/8/2019 Audley Financial Training

Trusts and IHT 16/8/2019 Audley Financial Training

What are RP trusts? Relevant Property trusts All Discretionary Trusts All IIP trusts set up after 22 March 2006 Non RP trusts Bare/Absolute Trusts IIP trusts set up before 22 March and no change of beneficiary since 5 October 2008 Will trusts setting up an Immediate Post Death Interest (IPDI) Trusts for the vulnerable and bereaved minors 16/8/2019 Audley Financial Training

Lifetime Gifts are PETS
On death of a beneficiary, the trust property is deemed to belong to them. Non Relevant Property Trusts Death transfers exempt or chargeable Lifetime Gifts are CLTS The trust property belongs to no one so if a beneficiary dies the property is not part of their estate. Instead the trustees may have to pay Periodic & Exit charges Relevant Property Trusts Death transfers are always chargeable 16/8/2019 Audley Financial Training

Bare Trusts Lifetime gifts are PETS therefore exempt if donor is alive 7 years after making the gift When beneficiary dies the trust property is part of their estate and executors are liable to pay the tax 16/8/2019 Audley Financial Training

Bereaved minor’s trust
Can only be set up through a will or intestacy on the death of at least one parent or step parent No IHT issues when property passed to beneficiary at 18 If beneficiary dies before 18, trust property is part of their estate The child gets an absolute right to the property at 18 16/8/2019 Audley Financial Training

Qualifying IIP trusts On death of the beneficiary, any tax liability is split between the trustees and the executors An IIP trust set up before 22 March 2006 and no change in Beneficiaries since 5 October 2008 The same process will apply to IPDI trusts The original lifetime gift would have been a PET but would have become exempt 16/8/2019 Audley Financial Training

Nathan died and had a NRB of £325,000. His estate was valued as £600,000 and he was also the life tenant of an IPDI trust set up by his late father. The trust property was £400,000 Estate £600,000 Trust property £400,000 £1,000,000 Less NRB £325,000 £675,000 £675,000 x 40% £270,000 Executors £600,000/£1,000,000 x £270,000 £162,000 Trustees £400,000/£1,000,000 x £270,000 £108,000 £270,000 16/8/2019 Audley Financial Training

Periodic charge RP Trusts Payable when a capital distribution is made
No one owns the property for IHT purposes Payable when a capital distribution is made 16/8/2019 Audley Financial Training

Calculating Periodic charge
(Value of fund at anniversary LESS Current NRB) x 6% Fund value at 10th anniversary in January £525,000 Periodic charge is £525,000 less £325,000 x 6% = £12,000 There cannot be a periodic charge if value of trust property is less than the standard NRB 16/8/2019 Audley Financial Training

Calculating exit charge after the 10th anniversary
We need to calculate the Effective Rate when the last Periodic Charge was made Effective Rate is Periodic Charge/Trust value Periodic charge £24,000, Trust value £725,000 Effective rate £24,000/£725,000 = 3.31% Trust value < NRB, ER is 0% therefore no exit charge. 16/8/2019 Audley Financial Training

Exit charge formula Capital withdrawn x ER x n/40 n = number of complete quarters since last periodic charge 16/8/2019 Audley Financial Training

Exit charge example Last 10 year anniversary 1/6/2015 Effective rate 3.31% £60,000 capital withdrawn 5/12/2018 That is 13 quarters £60,000 x 3.31% x 13/40 = £645.45 16/8/2019 Audley Financial Training

Exit charge first 10 years
Calculate hypothetical period charge at inception (Initial gift less 6% Effective rate is PC/Initial value Trust set up 1 June 2010 with a gift of £500,000 Periodic charge is (£500,000 - £325,000) x 6% = £10,500 Effective rate is £10,500/£500,000 = 2.1% 16/8/2019 Audley Financial Training

Exit charge first 10 years (2)
£75,000 paid out 1/8/18 That is 32 complete quarters since trust was set up. Exit charge £75,000 x 2.1% x 32/40 = £1,260 16/8/2019 Audley Financial Training

To avoid confusion Previous slides have used 6% in determining the Periodic Charge. This is an acceptable “short cut” HMRC would charge 20% and then charge 30% of this which is the same as 6% £40,000 in excess of NRB £40,000 x 6% = £2,400 £40,000 x 20% = £8,000 £8,000 x 30% = £2,400 16/8/2019 Audley Financial Training

18 to 25 trusts Set up on death of a parent or step parent Starts off as non-relevant property and becomes relevant property Trustees can pass property to beneficiary between 18 & 25 Enters relevant property regime at 18 No initial charge Nor periodic charge as maximum life of trust is seven years Exit charge but maximum is 4.2% on excess over NRB (6% x 28/40) 16/8/2019 Audley Financial Training

18-25 Trusts Set up by the will of a deceased parent or step parent Non-Relevant Property Trust Relevant Property Trust Possible exit charge but only if in excess of NRB Charge is 6% x n/40 Max number of quarters is 28 Max charge is 6% x 28/40 = 4.2% 18 25 No charge on becoming RP trust 16/8/2019 Audley Financial Training

IHT – Lifetime gifts to RP trusts
Gifts are CLT Usual 7 year cumulation rule on initial gifts will apply Gifts made jointly, e.g. husband and wife are deemed to set up two separate trusts and each can use their NRB We’ll now look at some more issues regarding RP trusts CLICK lifetime gifts are of course CLT CLICK and the usual cumulation rules will apply CLICK if a joint gift is made then they are deemed to have set up two seperate trusts 16/8/2019 Audley Financial Training

Cumulation Bob makes a gift of £300K on 1st March 2013 into a discretionary trust (assume AE used up) No tax as below NRB He makes a further gift of £300K of 1 November 2018. Below NRB but we must add in earlier gift to give a total of £600K £275K above NRB so this is chargeable at 20% or 25% if Bob pays the tax On 1 March 2020 the first gift will drop out and Bob will have some NRB left 16/8/2019 Audley Financial Training

X 6% LESS Periodic Charge Value of trust at its 10 year anniversary
Available NRB LESS X 6% Capital withdrawals in the last 10 years 16/8/2019 Audley Financial Training

Cumulation and Periodic Charge
CLT 1/2/2005 £200,000 Trust set up 1/2/2008 £400,000 Periodic charge calculated 1/2/2018 NRB £125,000 Periodic charge calculated 1/2/2018 Available NRB £325,000 The periodic charge CLICK is CLICK so if a trust was set up on 1/2/08 with a gift of £400,000 the Periodic charge CLICK will be calculated on 1/2/18. The trust has the full NRB of £325,000. However CLICK a further contribution of £200,000 was made on 1/4/2010 then this reduces the available NRB by £200,000 to £125,000 16/8/2019 Audley Financial Training

Order of giving PET £100,000 CLT £300,000 PET becomes exempt 10th anniversary of CLT. Full NRB available 10th anniversary of CLT PET is chargeable and NRB reduced by £100,000 1/9/2015 1/10/2015 1/9/22 1/10/2025 16/8/2019 Audley Financial Training

Order of giving If PET becomes chargeable, the trust’s NRB is not reduced when the periodic charge is calculated PET becomes exempt CLT £300,000 PET £100,000 10th anniversary of CLT. 1/9/2015 1/10/2015 1/10/22 1/9/2025 16/8/2019 Audley Financial Training

Order of gifts rule Helen is planning to make a PET to her daughter and set up an RP trust Which should she make first? If she makes the PET first and dies within 7 years it becomes chargeable and deducted from the NRB when calculating the periodic charge. If she makes the trust gift first and then the PET, and dies within 7 years of making the PET, the full NRB will be available in calculating the periodic charge. 16/8/2019 Audley Financial Training

Rysaffe principle For periodic charge purposes each trust has its own NRB provided they are set up on separate days. This does not reduce the initial CLT charge But setting up a number of trusts rather than just one can result in a lower Periodic Charge. 16/8/2019 Audley Financial Training

Single or Multiple Trusts?
Karl set up a single DT with a gift of £400,000 10 years later it’s value is £800,000 Periodic charge is £800,000 less £325,000 = £475,000 6% = £28,500 What’s the situation if he set up four trusts with a gift of £100,000 and the value of each at the 10th anniversary is £200,000? 16/8/2019 Audley Financial Training

10 year value NRB Chargeable amount Periodic Charge Trust 1 £200,000 £325,000 Trust 2 £325,000 Less Gift 1 £100,000 £200,000 £225,000 Trust 3 £325,000 Less Gift 1 +2 £200,000 £125,000 £75,000 £4,500 Trust 4 £325,000 Less Gift £300,000 £200,000 £25,000 £175,000 £10,500 1 single trust £28, separate trusts £15,000 16/8/2019 Audley Financial Training

Life protection policies under trust
If set up before 22/3/06 Premiums will still be considered PETS Premiums can be varied if pre 22/3/06 conditions allow this If set up after 22/3/06 will be CLTs but usually exempt either using annual exemption or gifts out of normal expenditure Value of policy nil until claim so unlikely to be exit or periodic charge 16/8/2019 Audley Financial Training

Trust planning What is the client trying to achieve? Would a trust meet these objectives? What type of trust should be used? What investment wrappers should be used? 16/8/2019 Audley Financial Training

Loan Trust Settlor lends property to the trust, usually cash Not a gift so not a PET or CLT Loan repaid to settlor usually by 5% withdrawals from an Insurance Bond Growth of the bond, after repaying loan outside the estate If it appears in an IHT calculation you must add the outstanding loan to the estate. 16/8/2019 Audley Financial Training

Discounted Gift Trust Discount Income to settlor Initial Gift Balance in Trust 16/8/2019 Audley Financial Training

Flexible Reversionary Trust
This enables the settlor to make a gift that is effective for IHT purposes And have the possibility of benefiting from the trust But will not fall foul of the Gifts with Reservation rules Nor will it be subject to POAT 16/8/2019 Audley Financial Training

CLT Settlor Trust Beneficiaries 16/8/2019 Audley Financial Training

How? Trustees invest gift into a series of single premium endowments Each with a different maturity date, usually 1 to 10 years At maturity date the trustees can decide whether to claim the proceeds or to extend the maturity date As the extension is exercised by trustees, they are not treated as new gifts by the settlor If the policy is not extended the proceeds are paid to the settlor Alternatively they can surrender policies at any time to pay to beneficiaries or assign policies to them 16/8/2019 Audley Financial Training

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