Understanding discretionary trusts
Up to 60 CPD minutes
Introduction
Discretionary trusts can be used to make gifts without giving any specific beneficiary an entitlement to either income or capital. Trustees use their discretion to fully decide when to distribute trust assets and to whom.
Advisers need to understand the tax on trust creation, in operation and when trustees distribute assets. The will also need to recognise how this may influence the choice of investment.
This module should take around 60 minutes to complete. It includes a short self -assessment quiz to test what you have learned and a 60 minute CII/PFS accredited CPD certificate can be claimed.
Advisers need to understand the tax on trust creation, in operation and when trustees distribute assets. The will also need to recognise how this may influence the choice of investment.
This module should take around 60 minutes to complete. It includes a short self -assessment quiz to test what you have learned and a 60 minute CII/PFS accredited CPD certificate can be claimed.
Outcomes
On completion of this module you should be able to:
- Explain the IHT treatment on transfers into a discretionary trust and the ongoing IHT position for the trustees
- Detail how trust income is taxed, including how the ‘tax pool’ works and how income distributed to beneficiaries is treated
- Determine when CGT may be payable on gifts into discretionary trusts and disposals by trustees
Learning material
This module covers the benefits of creating a discretionary trust, IHT implications both initially and during the life of the trust and also the income and capital gains tax of gifts into the trust and on the trust assets.
CPD minutes: up to 60
Read the discretionary trust guideOpens in new windowCPD minutes: up to 60
Post learning assessment
Question 1
If a settlor makes a £400k lifetime gift into a Discretionary trust - which of the following statements is incorrect?
a. The gift is a chargeable lifetime transfer.
b. The gift is a potentially exempt transfer.
c. The gift will immediately be subject to a 20% IHT charge on any amount over the settlor’s unused nil rate band, if paid by the trustees.
d. The gift will immediately be subject to a 25% IHT charge on any amount over the settlor’s unused nil rate band, if paid by the settlor.
a. The gift is a chargeable lifetime transfer.
b. The gift is a potentially exempt transfer.
c. The gift will immediately be subject to a 20% IHT charge on any amount over the settlor’s unused nil rate band, if paid by the trustees.
d. The gift will immediately be subject to a 25% IHT charge on any amount over the settlor’s unused nil rate band, if paid by the settlor.
Question 2
Trustees of a discretionary trust receive £5,000 dividend income and distribute this to a beneficiary. Which statement is correct?
a. The income paid to the beneficiary losses it’s source nature and is paid as trust income rather than dividend income.
b. Trustees of a discretionary trust are entitled to the dividend allowance so only need to account for tax on the balance.
c. Income can be mandated to the beneficiary with no tax payable by the trustees
d. Income paid to a beneficiary is subject to an IHT exit charge.
a. The income paid to the beneficiary losses it’s source nature and is paid as trust income rather than dividend income.
b. Trustees of a discretionary trust are entitled to the dividend allowance so only need to account for tax on the balance.
c. Income can be mandated to the beneficiary with no tax payable by the trustees
d. Income paid to a beneficiary is subject to an IHT exit charge.
Question 3
Selina has created two Discretionary trusts. One trust is invested in a residential property, with the other in a portfolio of shares and unit trusts. If both sets of trustees decide to sell all the assets– which of the following statements is incorrect regarding the CGT position?
a. Each set of trustees will have half of the individual CGT annual exempt amount.
b. A trust rate of 20% will apply to the disposal of shares and collectives.
c. Each set of trustees will have a quarter of the individual CGT annual exempt amount.
d. A trust rate of 24% will apply to the disposal of the residential property.
a. Each set of trustees will have half of the individual CGT annual exempt amount.
b. A trust rate of 20% will apply to the disposal of shares and collectives.
c. Each set of trustees will have a quarter of the individual CGT annual exempt amount.
d. A trust rate of 24% will apply to the disposal of the residential property.
Check your answers
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Any reference to legislation and tax is based on our understanding of United Kingdom law and HM Revenue & Customs practice at the date of production. These may be subject to change in the future. Tax rates and reliefs may be altered. The value of tax reliefs to the investor depends on their financial circumstances. No guarantees are given regarding the effectiveness of any arrangements entered into on the basis of these comments.