Understanding Absolute Trusts
Up to 30 CPD minutes
Introduction
An absolute trust, or bare trust as they are also known, is an arrangement whereby a settlor gives trustees cash or other assets to look after for a named beneficiary. The beneficiary is absolutely entitled to both the income and capital of the trust and their interest cannot be removed.
Advisers need an understanding of when recommending an absolute maybe suitable, the tax implications associated with this type of gift and how this may affect investment choice.
This module should take around 30 minutes to complete. It includes a short self -assessment quiz to test what you have learned and a 30 minutes CII/PFS accredited CPD certificate can be claimed.
Advisers need an understanding of when recommending an absolute maybe suitable, the tax implications associated with this type of gift and how this may affect investment choice.
This module should take around 30 minutes to complete. It includes a short self -assessment quiz to test what you have learned and a 30 minutes CII/PFS accredited CPD certificate can be claimed.
Outcomes
On completion of this module you should be able to:
- Explain how gifts into an absolute trust will be taxed
- Determine when the parental settlement rules may apply
- Describe how an absolute trust is treated for CGT and income tax
Learning material
This module covers how and why absolute trusts are created, a beneficiary’s right to the trust fund, as well as the taxation of the gift and trust assets for IHT, CGT and income tax – including the ‘parental settlement’ rule.
CPD minutes: up to 30
Read the absolute trusts guideOpens in new windowCPD minutes: up to 30
Post learning assessment
Question 1
How is a gift to an absolute trust treated for Inheritance tax purpose?
a. Potentially exempt transfer – with a 20% immediate charge on any amount above unused nil rate band.
b. Potentially exempt transfer – with no immediate charge and no IHT if settlor survives seven years.
c. Chargeable lifetime transfer – with a 20% immediate charge on an amount above any unused nil rate band.
d. Chargeable lifetime transfer– with no immediate charge but a tapered rate of IHT if settlor dies within seven years.
a. Potentially exempt transfer – with a 20% immediate charge on any amount above unused nil rate band.
b. Potentially exempt transfer – with no immediate charge and no IHT if settlor survives seven years.
c. Chargeable lifetime transfer – with a 20% immediate charge on an amount above any unused nil rate band.
d. Chargeable lifetime transfer– with no immediate charge but a tapered rate of IHT if settlor dies within seven years.
Question 2
Emily made a gift to an absolute trust for the benefit of her two children: Stephen aged 16 and Bonita aged 26. Which of the following is FALSE under parental settlement rules?
a. If the trust invests in an offshore bond, parental settlement rules will apply to Stephen’s share of any chargeable gain made before he is 18.
b. If the trust invests in equity funds which produce £200 dividend income, no tax would be due upon Emily as Stephen’s share of income is £100 or less.
c. If the trust invests in equity funds which produce £1,000 dividend income, £500 of all this income falls under parental settlement rules and taxed against Emily.
d. If the trust invests in an offshore bond, parental settlement rules will not apply to any 5% withdrawals made.
a. If the trust invests in an offshore bond, parental settlement rules will apply to Stephen’s share of any chargeable gain made before he is 18.
b. If the trust invests in equity funds which produce £200 dividend income, no tax would be due upon Emily as Stephen’s share of income is £100 or less.
c. If the trust invests in equity funds which produce £1,000 dividend income, £500 of all this income falls under parental settlement rules and taxed against Emily.
d. If the trust invests in an offshore bond, parental settlement rules will not apply to any 5% withdrawals made.
Question 3
Which of these statements is TRUE about the CGT in relation to an absolute trust?
a. A settlor can elect to use hold-over relief to defer any CGT created by transferring non-business assets to the trustees.
b. If a settlor makes a lifetime gift of portfolio of unit trusts into an absolute trust it is not a disposal for CGT.
c. Transferring trust assets to a beneficiary on reaching age of majority is ignored for CGT.
a. A settlor can elect to use hold-over relief to defer any CGT created by transferring non-business assets to the trustees.
b. If a settlor makes a lifetime gift of portfolio of unit trusts into an absolute trust it is not a disposal for CGT.
c. Transferring trust assets to a beneficiary on reaching age of majority is ignored for CGT.
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.