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Trust Inheritance Tax

Author

Andy Wood

Andy is a practical, creative tax adviser who assists a variety of clients in achieving their personal and commercial objectives in the most tax efficient manner.

Introduction – Trust Inheritance Tax

As Frank Sinatra sang, trusts and Inheritance Tax go together like a horse and carriage.

Or something like that.

However, it is true that when one is considering a new or existing trust then Inheritance tax should be front and centre of the mind. s very important to consider when dealing with trusts.

Prior to our old friend Gordon Brown’s intervention in March 2006, the landscape for trusts was pretty varied. For example, the IHT implications of setting up an Interest in Possession Trust (“IIP”) trust (a Potentially Exempt Transfer) differed from the creating of a Discretionary Trust (“DT”) which was a Chargeable Lifetime transfer.

This has all not be consolidated such that only two distinctions remain relevant

Type of trusts – trust inheritance tax

The inheritance tax regime for trusts varies depending on the type of trust you are dealing with.

There are essentially two different types of trust for trust inheritance tax purposes. These are:

  1. Qualifying IIPs; and
  2. The rest – made up of Non-Qualifying IIPs and DTs

Qualifying IIPs

In order for an IIP to be a qualifying IIP the trust then it must satisfy the following conditions:

  1. Must be established for the benefit of a disabled person
  2. Be created on death via a Will; and
  3. Established prior to 22 March 2006

The aassets of a Qualifying IIP are treated as part of the beneficiary’s estate and IHT will be paid on the assets of the trust following the death of the beneficiary in the usual manner. There will be no ongoing IHT considerations for the qualifying IIP.

The rest – relevant property trusts

In respect of the rest, – i.e. DTs and ‘non-qualifying’ IIPs – these are classed as ‘relevant property trusts’.

Assets that are comprised in a relevant property trust will not fall within the estate of any person.

As such, the establishing of a relevant property trust will have other significant pinch points for IHT purposes. These are as follows:

  • On creation of the trust as a Chargeable Lifetime Transfer;
  • On the 10-year anniversary of the trust; and
  • When capital assets are distributed from the trust

Creation of a relevant property trust – Chargeable Lifetime Transfer (“CLT”)

Where a settlor creates a relevant property trust and the value of the assets transferred to the trust exceed the nil rate band (£325k) then there is an immediate charge to IHT. This is 20% x the excess.

This charge could be reduced or eliminated if the assets transferred to the trust qualify for a relief such as Business Property Relief.

10-year anniversary charge

As a result, an IHT falls on the trust at each 10-year anniversary following the creation of the trust.

Calculating these IHT charges is not a simple affair and I do not propose to discuss it in this article. However, the maximum applicable rate every 10 years, in the absence of any reliefs such as Business Property Relief, is 6% of the value of the trust assets exceeding the relevant nil rate band at the time.

Capital distribution – Exit charge

Further, there might also be an IHT charge when capital distributions are made from the trust. Again, the maximum rate is 6% depending on when the capital is distributed in relation to the 10-year anniversary of the trust.

If you have any queries around trust inheritance tax, or trust taxation in general, then please do get in touch.

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