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Question
A client wishes to give some of her wealth to her grandchildren, as she has read that she can avoid inheritance tax by doing this. She is not sure whether to give them a set of works of art, or whether to give them cash. She is worried about giving substantial sums of money to some of the younger grandchildren, in case they squander the money or make undesirable friends as a result.

Answer
She could consider transferring the assets onto an accumulation and maintenance trust. The transfer would be a potentially exempt transfer (PET), which would not attract inheritance tax provided she lives for seven years.

If she were to transfer the works of art into the trust, there would be a chargeable gain on the gift for capital gains tax. The gain would be calculated by reference to the market value of the set at the date of the transfer. Cash is not a chargeable asset for capital gains tax and would not give rise to a charge to tax.

The advantage of an accumulation and maintenance trust is that none of the beneficiaries has a right to the income or the capital of the trust.

The trust’s assets are held for the benefit of the beneficiaries, at least one of whom must has a right to the income (but not necessarily the capital) by the time s/he is 25.

Subject to that proviso, any payments or right to income or capital are at the discretion of the trustees, who may release income or capital for the beneficiaries’ education or maintenance.

Your client can choose the age at which the grandchildren become entitled to the income or capital (provided they achieve a right to income by the age of 25), but under present legislation, if they become entitled to the income prior to the capital, there would be a capital gains tax charge when the capital is distributed to them. If they become entitled to the income and capital at the same time, the gain could be held over.

Technical Factsheet 80: Trusts - A Basic Framework is now available. To obtain a copy telephone ACCA UK on 020 7396 5954 or visit www.accaglobal.com/practicechannel/publications/compendium/

Question
Some of my clients have received “start notices” in March to operate new tax credits while others haven’t. Certain individuals are claiming the credits for the first time. What are the options available?

Answer
The working tax credit and child’s tax credit replace the old regime of the working families’ tax credit and children’s tax credit. Subject to the qualifying conditions anyone, whether employed or unemployed, may claim the tax credit.

One of the main differences with the child tax credit is that it will be paid directly into the bank account of the individual caring for the child. The child tax credit attempts to reduce the administrative burden of processing credit payments, as they now pay the person who is mainly responsible for caring for the children.

Qualifying for the Credit
The following criteria apply:

• child tax credit may be claimed by UK resident individuals who are aged 16 or over and are responsible for at least one child or qualifying young person
• working tax credit is paid in addition to the child tax credit and may be claimed by UK resident individuals who are employed or self-employed who usually work for 16 hours or more a week, are paid for that work, and expect to work for at least four weeks
• those who are aged 16 or over and responsible for at least one child, aged 16 or over and disabled, or are aged 25 or over and usually work at least 30 hours a week.

Value of New Credits
The tax credits will differ according to everyone’s circumstances. The Inland Revenue has built a website that calculates whether an individual qualifies, and the level of credit, at: www.taxcredits.inlandrevenue.gov.uk/Qualify/DIQHousehold.aspx

How the Employer Knows Which System They are Operating
The employer will receive a “start notice” from the Inland Revenue (provided they have been operating under the old tax credits) during March 2003. These will give notification to the employer to start paying the new working tax credits to their employees from May 2003.

How an Individual Claims the Credit
If the individual has not claimed under the old system, and if they qualify for the payment, they will be required to fill out the new claim form (available from the Inland Revenue’s website).

How the Working Tax Credit will be Reimbursed to the Employer
The employer will deduct the working tax credit out of total deductions from pay in the order of:

1. PAYE deductions
2. student loan repayments
3. NIC deductions
4. CIS deductions.

If there are insufficient deductions to cover the working tax credit employers may apply in advance to the Inland Revenue for advance funding to cover the payment.

Records the Employer Must Keep
The employer must record each payment of the working tax credit on the employee’s payslip, using the description of “tax credit”. The employer must also disclose details of the working tax credit on the forms P11 (deductions working sheet), P60 (end of year certificate), P35 (employer’s annual return) and P14 (end of year summary).

FAQs are compiled by the Technical Advisory Service

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