NISAs and Basic Rate Taxpayers

There is a tax advantage for basic rate taxpayers if the NISA funds are invested in fixed interest securities and other investments that would otherwise be subject to basic rate income tax. This is because the NISAs are tax free. However, such investments might not suit your overall strategic investment needs.

For a basic rate taxpayer, the NISA provides very little real advantage where the funds are invested in UK equities. The NISA managers cannot reclaim the tax credit on dividend income and very few taxpayers have gains that exceed the annual Capital Gains Tax exempt amount.

Tax Treatment of Trusts

Tax Treatment of Trusts

Trust Types

Bare trusts

Assets in a bare trust are held in the name of a trustee. However, the beneficiary has the right to all of the capital and income of the trust at any time if they’re 18 or over (in England and Wales), or 16 or over (in Scotland). This means the assets set aside by the settlor will always go directly to the intended beneficiary.

Bare trusts are often used to pass assets to young people – the trustees look after them until the beneficiary is old enough.

Interest In Possession Trusts

These are trusts where the trustee must pass on all trust income to the beneficiary as it arises (less any expenses).

Trusts For Vulnerable People

Some trusts for disabled people or children get special tax treatment. These are called ‘trusts for vulnerable beneficiaries’. A vulnerable beneficiary is either:

  • someone who has a mental or physical disability
  • someone under 18 whose parent has died

Income Tax

If a trust has at least one trustee resident in the UK, there is a liability to income tax.
Trustees are jointly and severally liable – not just a share of it.

Bare trusts

Beneficiaries are responsible for paying tax on income from it on a Self Assessment tax return.
If beneficiary is settlor’s child and gross income >£100, the settlor is responsible. If grandparent or anyone else then parents aren’t liable and income is taxed at normal rates with personal allowances.

Interest In Possession Trusts

If beneficiary is settlor’s child and gross income >£100, the settlor is responsible.
If not, the trustees are responsible for paying Income Tax without the benefit of a personal allowance:

Dividend-type income: 10% (covered by tax credit)
All other income: 20%. If income received net then no action need; if gross, trustees need to pay 20%.

Beneficiaries pay the difference at their marginal rate:
Savings = Non-tax payers can reclaim tax, Higher rate tax-payers pay extra 20%, Additional rate tax-payers pay extra 25%
Dividend = Higher rate tax-payers pay extra 22.5%; Additional rate tax-payers pay extra 27.5%

Discretionary Trusts

If beneficiary is settlor’s child and gross income >£100, the settlor is responsible. If not, the trustees are responsible for paying Income Tax without the benefit of a personal allowance and the first £1,000 is taxed at the standard rate.

If the settlor has more than one trust, this £1,000 is divided by the number of trusts they have. However, if the settlor has set up 5 or more trusts, the standard rate band for each trust is £200.

TRUST INCOME UP TO £1,000

Dividend-type income -10%

All other income – 20%

TRUST INCOME OVER £1,000

Dividend-type income -37.5%

All other income -45%

Trust Income Tax Example

Dave is a basic rate tax (BRT) payer and received £3,000 discretionary trust income.
£3,000 was net of 45% so to gross up = £33,000 ÷ 0.55 = £5,454.55 x 20% (BRT rate) = £1,090.91.
£2,454.55 was deducted by the trustees (£5454.55 – £3,000) so Dave can reclaim £1,363.64 (£2454.55 – £1,090.91) via self assessment.

Trusts And Dividend Tax Credit

There is a 10% tax credit on dividends from UK companies (and some non-UK companies) because the dividends come from profits on which the companies have already paid tax. This means:

  • dividends that fall within the standard tax rate band won’t be taxed as the tax credit covers them
  • dividends above the standard rate band will be taxed on the trustees at 27.5%

Trusts and Capital Gains Tax

Bare Trusts

Settlor: Can claim holdover relief if gift is business asset.

Beneficiary: pays tax at 18% / 28% after 11k annual exemption and declares on self-assessment.

Interest in Possession Trusts

Settlor: Can claim holdover relief if on any gain when property goes into trust.

Trustee: pays on 28% on disposals within fund or transfers to beneficiary after annual trust exemption of £5,500 (spread across all trusts to minimum of £1,100).

No CGT is due on death of life tenant unless holdover relief was claimed when property was placed under trust.

Discretionary Trusts

Settlor and Trustee: as above

Beneficiary: Can claim holdover relief on receipt of asset and can have losses transferred to them.

IHT

Bare trusts

Settlor: Any tax due < 7 years is paid by trustees.

Trustee: Gift into trust is a PET. If beneficiary dies, the value of the trust asset is added to their estate on death and the trustees are liable of the proportion of tax due.

Interest in possession trusts

Trusts created earlier than 22/3/06 – gifts were classed as PETs and so no IHT to pay now.

Trusts created after 22/3/06 – gifts are treated as Chargeable Lifetime Transfers.

Discretionary Trusts

Chargeable Lifetime Transfers of 20% (25% if paid by settlor) of assets if greater than nil rate band of £325,000 (2014/15).

10 year charge @ 30% of CLT rate (40 x 30% = 6% ) if greater than nil rate band of £325,000 (2014/15).

Exit charge @ % according to number of months since immediate or 10 year charges

Gift aid

Gift aid was introduced to encourage charitable giving by giving tax relief for donations. There is no minimum or maximum payment.

Tax Relief

The donation to the charity is treated as a payment on which the donor has already paid tax at the basic rate (20%). The charity can then recover the tax deducted. The grossed-up donation is an amount which, alter deducting income tax at 20%, is equal to the payment made to the charity.

Declaration

The donor must make a declaration that the gift is being made under gift aid. This can be made by completing a form, or by phone or Internet.

Charity’s Location

The charity must be established in the UK or in another EU Member State, Norway or Iceland.

Donor’s Residence Status

The donor need not be a UK resident if the gift is made out of income or gains subject to UK tax.

Personal Allowance Adjustments

The donor’s basic and higher rate tax limits (the amounts of income above which higher rate tax and additional rate tax are payable) are both increased by the grossed-up amount of the donation.

The effect of increasing the basic and higher rate bands by the grossed-up donation is to give the donor an extra 20% or 25% tax relief depending on their marginal rate of tax. More income is taxed at 20%, but a corresponding smaller amount of income is taxed at either 40% or 45%.

Tax Liability

Donors should make sure that they have a tax liability, including any tax deducted at source and dividend tax credits, of at least the amount of tax deducted from the donation. If they do not, they will have to pay the excess tax deducted from the donation to HMRC. For this reason, non-taxpayers should not use this facility.

Reciprocal Benefits for Donor

Any reciprocal benefit received by the donor from the charity must not exceed the following limits and must be considered on an annual basis where a donor makes a series of gifts.

  • 25% of the donation for donations up to £100;
  • £25 for donations between £101 and £1,000;
  • 5% of the donation for larger gifts, subject to an overriding limit of £2,500.

Carry-Back From Previous Tax Year

Donations can be treated as made in the previous tax year provided the carry-back claim is made no later than the date the donor submits his or her tax return and, in any event, not later than the 31 January tax return submission deadline.

Amateur Clubs

Individuals can also make gift aid donations to registered community amateur sports clubs on the same terms as to charities.

Charities Aid Foundation

Centralised charities such as the Charities Aid Foundation allow donors to make gill aid payments to their scheme, which processes payments. The scheme recovers the tax from HMRC and donors can make gifts amounting to their gross donation to many different charities using a special cheque book or card. The charities that are the final recipients of the gifts do not recover the tax from HMRC themselves.

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