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TRUSTS More and more people are turning to trusts as an effective way of tax planning. There are several types of trust, which are used for differing purposes. 1. Discretionary Trusts As the name infers, the beneficiaries are only entitled to income from this type of trust at the discretion of the trustees. When assets are put into the trust, a Capital Gains (CGT) and Inheritance Tax (IHT) position occurs. However, these can be reduced by hold-over relief (CGT), and Business Property relief and the annual allowance (IHT). If any assets are sold by the trustees, a 40% CGT charge will be imposed, after allowing for an annual allowance (currently half the personal CGT allowance). Every 10 years an IHT charge of up to 6% is payable by the trustees, based on the value of the trust. Any income from the trust assets attracts a tax of 40% per annum.
2. Accumulation and Maintenance Trust This is a type of discretionary trust and was a keen example used by grandparents and parents for their grandchildren and children. Although where gifts are put into the trust a capital gains tax situation arises, there are opportunities to claim hold-over relief on business assets. The trust can sell assets, but only gets an annual allowance of half the normal personal CGT allowance and pays a rate of 40%. Under the old rules, when the gift was made it qualified as a potentially exempt transfer (PET) and relevant assets can attract 100% business property relief,and the ten year charge associated with normal discretionary trusts was waived, and were free of IHT when the beneficiaries take over the assets. In the 2006 budget all these benefits were removed, limiting the use of this type of trust. Although the trust can be set up to exist for many years, it is stipulated that a fixed income from the assets must be given to beneficiaries before their 25th birthday. Income of the trust is taxed at 40% (or 25% for dividends).
3. Interest in Possession Trust This type of trust entitles the beneficiary to an income, but not the capital. When the gift is transferred IHT is now chargedin all but a minority of cases. There is now the 10 year and exit charge as with other trusts, unless set up for disabled people. Income of the trust attracts tax at 20 or 22% depending on the type of income. The downside is that CGT is chargeable on the transfer into the trust, however, hold-over relief for business assets is available. Normal CGT rules exist on any sale of an asset attracting tax at 40%, and only having half the personal annual CGT allowance as a deduction. CGT may also be payable on the transfer of the asset to the beneficiary.
4. Bare Trust This type of trust holds assets on behalf of someone who is absolutely entitled to that property. Any income or CGT that the trust incurs belong to the absolutely entitled person, and therefore the trustees do not normally find themselves liable to tax.
There are many other types of trust, and as you can see, the rules are varied and very complex. We would strongly recommend that you obtain professional advise in this field before taking any action. Please contract us to discuss your needs. |
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