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Taxation Of Trusts Notes

LPC Law Notes > Private Client Notes

This is an extract of our Taxation Of Trusts document, which we sell as part of our Private Client Notes collection written by the top tier of Cambridge And Oxilp And College Of Law students.

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= falls within relevant property regime ('RPR')
Type of Trust/

Settlements with an interest in possession


Created before 22 March 2006
Creation inter vivos:
 Transfer = PET
 Only chargeable if the settlor dies within 7 years
 If it became chargeable, the tax would be paid by the trustees out of the trust fund

Creation on death:
 The assets in the trust are treated as part of the property of the deceased
 IHT is charged at the death rate
 Tax would be paid by the PRs out of the estate
Implications for the beneficiary with interest in possession:
 After the creation of the trust, the beneficiary with the interest in possession will be treated for IHT as if they owned the underlying capital
 If the trust terminated during the lifetime of the beneficiary with the interest in possession or they ceased to be entitled to it, IHT
rules treat the beneficiary as if they had made a gift - the transfer would be a transfer of value made by that beneficiary
On termination on death of the life tenant:
 The trust assets will be treated as part of the property of the deceased life tenant and aggregated with the assets they own personally
 IHT will be charged at the death rate
 The trustees are liable for paying the tax on the value attributable to the trust fund

On Creation:

Created on or after 22 March 2006
 Creation of any lifetime trust = LCT
(exception: disabled trusts - s.89 IHTA 1984)
 All lifetime trusts are within the relevant property regime
On Creation:
 Chargeable transfer whether trust is created inter vivos or on death

an inter vivos transfer to a discretionary trust will be a LCT
chargeable to IHT at the lifetime rate (20%)
o where the discretionary trust is created on death, IHT will be charged at the death rate (40%)
 The tax will be paid by the trustees or by the settlor, depending on the terms of the trust
During the existence of the trust:
 An anniversary charge is levied on the "relevant property" (i.e. the capital plus any accumulated income) in the fund on every tenth anniversary of the creation of the trust

rate will be no more than 30% of 20% (i.e. 6%)
 An exit charge is made whenever property leaves the settlement -
usually occurs when trust property is appointed to a beneficiary,
or when an interest in possession arises in part of the trust property

tax is charged on the fall in value of the fund at the trust rate
- rate will be no more than 6%
o no exit charge within 3 months of creation or 3 months after an anniversary charge

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