TAXATION OF TRUST

A trust is an arrangement where:

property (known as the trust assets or settled property)

is transferred by a person (known as the settlor)
to the trustees
to be held for the benefit of one or more specified persons (known as the beneficiaries)
on specified terms in the trust deed.

2 Types of trust

There are two main types of trust examinable at ATX:

Discretionary trusts, and

Interest in possession trusts (also known as life interest trusts).

Discretionary trusts

A discretionary trust is a flexible settlement where

 the beneficiaries have no legal right to benefit from the income or capital of the trust
 any distribution of income or capital out of the trust is at the complete discretion of the
trustees.

The trustees can determine how to meet the needs of the beneficiaries as and when they arise.
In a typical discretionary trust the trustees may have power to decide:

whether or not trust income is to be accumulated or distributed

 how the trust assets are managed and invested to generate income and capital growth
 how the trust income and the capital of the trust is to be shared amongst different
beneficiaries.
 discretionary trust income is always deemed to be received by the beneficiary net of 45%
tax and is always taxed as non-savings income
 a 45% tax credit is available to deduct from the IT liability of the beneficiary .


Interest in possession trusts

An interest in possession (IIP trust) exists where:

a beneficiary has an interest in the assets of the trust.

An IIP can be the legal right:

to receive income generated by the trust assets, and/or

to use a trust asset or live in a property owned by the trust.
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 The beneficiary who receives the right to income or use of an asset under an IIP is known as the
'life tenant' of the trust.
 The beneficiary who receives the capital assets in the trust when the life interest comes
to an end is known as the remainderman
 The remainderman is said to have a 'reversionary interest' in the trust assets as the
assets will only revert to them when the trust comes to an end.
 the income of an IIP trust is received by the beneficiary net of 20% tax (7.5% for
 dividends).
 a 20% tax credit (7.5% for dividends) is available to deduct from the IT liability of the

beneficiary.

CAPITAL TAXES AND TRUST

INHERITANCE TAX CONSEQUENCES

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TAX PLANNING

By gifting assets into a trust during the individual's lifetime, the assets will no longer
form part of the settlor's estate on death.
Assets which appreciate in value can be transferred into the trust and will increase in
value outside of both the settlor's and the beneficiaries estates.
The exit charges and principal charges levied on some trusts are a maximum of 6%
which may not be significant in the context of the financial planning requirements of the
individual settlor.
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Trustees of a discretionary trust can choose to give income generated from the assets to
the beneficiaries who are non-taxpayers so that a repayment of income tax paid by the
trustees can be claimed.