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Tax for 18yr old on income from trust

18yr old has been assigned value from a grandparent via a trust and wants to cash in

Didn't find your answer?

If he cashed in the whole value, lets say £25k, how is that taxed? 

I think its liable to income tax but the original amount that was paid in by the grandparent would be deducted. In this case £7k.

I'm told that because the profits that sit in that fund will have already suffered Corp Tax, that he would only be liable for any tax if his earnings tip over and above the basic rate threshold. If thats correct then he apparently completes his self assessment as receiving the net £18k income, pays tax on it but then reclaims the overpaid tax on an R40.

or he could just cash in enough to be below the £12.5k PA so he pays no tax, and cashes in the remainder after tax year end..... hence no need to then reclaim anything as its all under the PA in both years.

What if we can't establish exactly what the approx £7k value was, as it was so many years ago and the grandparent is now deceased?

Can anyone confirm or offer other advice?

Many thanks

 

Replies (14)

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By ireallyshouldknowthisbut
16th Mar 2021 10:19

Step 1, establish what type of trust this is.

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By loverboyfullofjoy
16th Mar 2021 10:25

The £7k isn't taken into account. If he has no other income, the best way forward would be to draw a net sum that equates with a gross of £12.5k and he would receive back all the tax on the R40 issued to him through self assessment on the trust income part of the return. Then to take the balance after the tax year-end.
And has the other person has said you must establish was sort of trust this is.
I do this for my wife and brother in law, but has I don't have the trust form to file with their SA form then I have download the trust form and post it to HMRC in paper form.

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Replying to loverboyfullofjoy:
By Growth partners
16th Mar 2021 11:05

Thanks, though surely if he took only the amount to keep below the £12.5k PA, then the self assessment wouldn't calc any tax as due, and so no need to then reclaim on R40? or have I missed something?

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By Tax Dragon
16th Mar 2021 10:33

I'd say step 1 was to get someone involved that knows about trusts. The taxation of trusts and payments out of trust has aspects that are unique - you won't have seen the equivalent in your day job. And it's not unlikely that the terms of the trust make the decision as to what is taxable and how for you - and it won't be a matter of splitting across year end or whatever.

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Replying to Tax Dragon:
By Growth partners
16th Mar 2021 10:47

Thanks.

It was a Life Assurance trust that has now been assigned absolutely for the 18 yr old. Maybe the trust itself is irrelevant as it no longer exists, per se. The Aviva paperwork actually refers to it as an Investment Bond....?

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Replying to Growth partners:
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By More unearned luck
16th Mar 2021 12:35

Ask Aviva for a forecast of the chargeable event gain that would arise on surrender. Establish whether or not there is notional tax credit. A CEG of c £18K with a tax credit will only result in more tax if the client's income is sufficient to make the gain wholly or partly liable to HR tax.

TD's remarks about passing the case on to someone who knows about trusts seems out of place since the trustees are not your clients and the bond is no longer trust property.

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Replying to More unearned luck:
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By More unearned luck
16th Mar 2021 12:39

The above assumes that granddad is long dead, which seems likely from what you say. My answer might be different if the death is recent.

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Replying to More unearned luck:
By Growth partners
16th Mar 2021 12:50

The death is just over a year ago, but the trust has been fully aligned to him. Does that make a difference?

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Replying to More unearned luck:
By Growth partners
16th Mar 2021 12:49

Great, thanks, and my research had just got to the same point actually.

No other income for him, so he'll be below the HR tax threshold.

Oly remaining question is that when we disclose that gain of c£18k on SA101 form, does it calc a tax liability that he would have to pay, and then reclaim on an R40 or something, or will the self assessment online calc immediately deduct the credit, i.e. no tax will be due...?

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Replying to Growth partners:
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By Tax Dragon
16th Mar 2021 13:01

More information has indeed changed my answer, but what makes you think the CEG isn't taxable on the trust?

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Replying to Tax Dragon:
By Growth partners
16th Mar 2021 13:06

my understanding is that no tax on death in the trust and then it gets passed via assignment to the beneficiary (the 18 yr old) 'as if he's always owned it', and he would be taxed in the way we've just described above.

The policy was taken out 17 years ago so he'd accumulate 17 x 5% annual reliefs so the CEG would actually be the £25k less 85% of the initial £7k.

I think .... delighted to be educated though

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Replying to Growth partners:
By Growth partners
16th Mar 2021 13:07

and Aviva are indeed calculating the CEG and have verbally confirmed the 17 x 5% principle to me

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Replying to Growth partners:
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By More unearned luck
16th Mar 2021 14:47

The 17 lots of 5% is only relevant to partial surrenders.
Was granddad the only life assured? If so, the chargeable event would have been his death, with gain taxable upon him.

I modify TD's advice to you need to pass the case to someone who understands the chargeable event regime.

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Replying to More unearned luck:
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By Tax Dragon
16th Mar 2021 14:59

I accede to that modification.

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