Income Tax
The Life Tenants will have a right to income as it arises and this will usually mean that income is mandated to them (paid direct automatically). Such income would be declared on a Life Tenant’s own tax return and taxed accordingly.
Some income may still have to be declared by the trustees, for example non-mandated foreign income, accrued income on gilts and deeply discounted securities. The trustees may have to declare this income and pay tax on it at the rate applicable to trusts (currently 38.1% for dividend income and 45% on other income).
Assets held within the trust are treated for Inheritance Tax purposes as if they belong to the Life Tenant. If the trust is brought to an end during the Life Tenant’s lifetime, the Life Tenant is treated as having made a Potentially Exempt Transfer (PET) for Inheritance Tax, equivalent to the capital value of the trust. If the Life Tenant dies within 7 years of the termination of the trust, the PET will be aggregated with their own estate for calculation of Inheritance Tax.
If the trust comes to an end on the death of the Life Tenant, again the capital value of the trust will be aggregated with the Life Tenant’s estate to calculate Inheritance Tax due. If the value of the trust and the estate together exceed the Nil Rate Band (currently £325,000) tax will be due at 40% on any excess and this will be apportioned between the trust and the estate.
The trustees and executors can make use of the usual exemptions (eg, where trust or estate assets pass to a surviving spouse or to charity), and the transferrable nil rate band rules (where the Life Tenant is a widow or widower), to reduce the tax payable.
The Trust is not subject to 10 yearly charges or charges when an asset leaves the trust, unlike the tax treatment of Discretionary Trusts.
If you require further information, please contact Mary Harty on 0117 9292811 or by e-mail at mary.harty@wards.uk.com.
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