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I am the beneficiary of a trust in the UK and I remember being told previously to expect a 10-year charge on the trust. A friend told me recently that the government plans to make the taxation of trusts simpler. Is the 10-year charge something that is still relevant?
Jeremy Curtis, partner at Pemberton Greenish, says in a word — yes. There has been talk of simplification for a number of years, but nothing has yet been done and there are no clues as to what, if anything, might lie ahead.
Ten yearly charges are inheritance tax charges. Not all trusts suffer them, but most do. This follows the changes made in March 2006 — the last major change to the taxation of trusts. If you have been told to expect a 10-year anniversary charge, then it is probably safe to assume your trust is among them.
The tax charge is a nuisance but it may not be as bad as you fear. The rate is not high, a maximum of 6 per cent and in most cases rather less. By contrast, trusts outside this regime, although escaping these periodic charges, are taxed at 40 per cent on the death of the beneficiary, then entitled to receive the income.
The complicated aspect of the charge is working out the rate at which the tax is charged. Most cases follow this basic example. A grandparent having made no other gifts creates a trust for her grandchildren with £325,000 (the nil-rate band at the time). At the 10-year anniversary the trust is worth £500,000, the nil-rate band is still £325,000. The tax on the anniversary will be 6 per cent of £175,000, the excess over £325,000 — so it would result in a bill of £10,500 and an overall tax rate of 2.1 per cent.
However, any of the following could complicate the calculation and alter the tax:
- If the settlor (in our example, the grandparent) had made gifts in the seven years preceding and including the date on which the trust was created
- Whether the settlor survives the gifts in that seven-year period by seven years
- How many settlors there are (and, yes, there can be more than one)
- Whether more assets have been added to the trust subsequently, and when
- Whether assets have been distributed from the trust, and when
- Whether there are any reliefs available — for example Business Property Relief and Agricultural Property Relief
- The domicile of those who add to the settlement and whether the assets settled by them are located in the UK.
Fully understood, the regime is logical and arguably fair — even kind — to the taxpayer. Although simplification is making it easier to understand and apply, it must alter the resulting tax. But it is hard to imagine such a change would deliberately reduce the tax. Perhaps that is why simplification is so long in coming.
Basil Dixon, partner at Payne Hicks Beach, says broadly, all discretionary trusts and any trust, whether a discretionary trust or a life interest trust, established by an individual during their lifetime and after March 22 2006 will be caught by the relevant property regime.
Trusts established under an individual’s will and which give a beneficiary a life interest are not caught by these.
Among other things the relevant property regime provides that, on every 10-year anniversary of the establishment of a trust, there will be a charge to IHT of 6 per cent on the value of the trust assets.
The usual reliefs (business property relief and agricultural property relief) can be claimed and each trust has its own nil-rate band, currently £325,000, which effectively serves to reduce the value of the trust when calculating the 10-year charge.
Strictly speaking, 10-year charges are not the concern of beneficiaries as the responsibility for reporting and paying the charge falls on the trustees who can use the trust fund to discharge their liabilities (if there are available funds).
The changes to the rules over the past six years have been technical in nature and have not fundamentally altered the position for most trusts, for which 10-year charges will continue to apply.
Following a request from the chancellor Philip Hammond in January 2018, the Office of Tax Simplification (OTS) is now reviewing the IHT rules to check that they are “fit for purpose”. In April 2018, the OTS published an IHT review and asked for comments, including on the IHT treatment of trusts.
It is not clear how much time the OTS will spend looking at 10-year charges, which is disappointing because the regime is mired in complexity and can present very real administrative headaches for trustees of even low value trusts.
The OTS is expected to publish its report this autumn so we will know more by then, although anyone hoping for a simplification of the 10-year charge regime should not hold their breath.
Until the law changes the only thing that trustees can do is to make sure they know when the next 10-year charge of their trust is and, when the time comes, to calculate and pay the tax.
The opinions in this column are intended for general information purposes only and should not be used as a substitute for professional advice. The Financial Times Ltd and the authors are not responsible for any direct or indirect result arising from any reliance placed on replies, including any loss, and exclude liability to the full extent.
Do you have a financial dilemma that you’d like FT Money’s team of professional experts to look into? Email your problem in confidence to firstname.lastname@example.org
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