Trust Taxation

• Topic 01

  Trust Taxation

  27 questions

A few questions from this unit, with the answer and a full explanation. The complete bank is available when you start practising.

1. What is an Immediate Post-Death Interest (IPDI) and how is it treated for IHT?

   • A
     An IPDI is an IIP trust created after 22 March 2006 and is therefore always a relevant property trust
   • B
     An IPDI is any trust created within 2 years of death; it is treated as a relevant property trust
   • C
     An IPDI is an IIP trust created on death under a will or intestacy; it is treated as part of the life tenant's estate for IHT, like a pre-2006 IIP trust
     Correct answer
   • D
     An IPDI is a post-death trust created by a deed of variation; assets are treated as part of the deceased's estate not the beneficiary's
   Explanation

   An Immediate Post-Death Interest (IPDI) arises when a will creates an IIP trust on death (e.g. leaving a life interest to a surviving spouse and the capital to children). Although created after 22 March 2006, IPDIs retain the beneficial pre-2006 treatment: the trust assets are included in the life tenant's estate for IHT, meaning that no periodic or exit charges apply. On the life tenant's death, the assets pass to the remainder beneficiaries and form part of the life tenant's death estate. This is important for spousal planning.

2. What is an interest in possession (IIP) trust?

   • A
     A trust where income is accumulated within the fund for distribution as a lump sum in the future
   • B
     A trust where the beneficiary has an absolute right to both income and capital, with no restrictions
   • C
     A trust where one beneficiary (the life tenant) has the right to receive income from the trust assets as it arises, while the capital is held for remainder beneficiaries on the life tenant's death
     Correct answer
   • D
     A trust where the settlor retains an interest in the income during their lifetime
   Explanation

   In an IIP trust, the life tenant has a right to receive the income as it arises from the trust assets; they cannot demand the capital. On the life tenant's death (or other specified event), the trust capital passes to the remainder beneficiaries. The life tenant reports the trust income in their own tax return at their personal rates. The IHT treatment depends on whether the trust was created before or after 22 March 2006, with significant differences in how it interacts with the life tenant's estate.

3. What is CGT holdover relief under S260 TCGA 1992 and in what circumstances is it available on a transfer into a trust?

   • A
     S260 holdover relief automatically applies to all transfers into trusts without any election required
   • B
     S260 holdover relief exempts the gain permanently on transfers into bare trusts where the beneficiary is a minor
   • C
     S260 holdover relief allows the transferor and trustees to jointly elect to hold over the gain on assets transferred into a discretionary trust (a chargeable lifetime transfer for IHT); the trustee takes a reduced base cost equal to the transferor's original cost
     Correct answer
   • D
     S260 holdover relief allows the gain to be deferred until the beneficiary sells the asset, but the full gain crystallises at that point without any base-cost reduction
   Explanation

   S260 TCGA 1992 holdover relief applies to gains on transfers that are chargeable transfers for IHT purposes — primarily transfers into discretionary (relevant property) trusts. It requires a joint election by the transferor and the trustees. The gain is 'held over': it is not charged at transfer; instead, the trustees take a reduced base cost (original cost minus the held-over gain). When the trustees eventually sell the asset, the full gain (including the held-over amount) becomes chargeable. S260 is separate from S165 holdover relief for business assets, which applies regardless of whether the transfer is a CLT.