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Question 4b ii

King, a wealthy client of your firm with a significant property portfolio, requires advice on the capital gains tax and inheritance tax implications of transferring assets to a trust and to his two children.

King’s family:
– King’s daughter, Florentyna, is 34 years old and has two young children.
– Florentyna will have income from part-time employment of £10,000 in the tax year 2015/16. This is her only source of taxable income.

King’s plans:
– On 1 October 2015, King will put a cottage he owns in Newtown and the after-tax cash proceeds from the sale of the shares in Wye Ltd into an interest in possession trust for Florentyna and her children.

Creation of the interest in possession trust:
– King will pay any inheritance tax arising as a result of the gifts made to the trust.
– Florentyna will be the life tenant and her two young children will be the remaindermen of the trust.
– Florentyna will live in the cottage in Newtown and the trustees will invest the cash in quoted shares which will generate annual dividends of £3,000.

Required:
(ii) Explain how Florentyna will be taxed on the income arising in the trust and calculate the additional income tax, if any, payable by her in respect of this income for the tax year 2015/16. (4 marks)