Periodic charge calculations – key considerations when providing advice to trustees

Checking the date that the trust was established will help identify those trusts that have past, or are approaching, the 10-year anniversary and need to be reviewed. The following checks may help identify which trusts the adviser needs to focus on.

• Which trusts paid any entry charge - This is a quick way of identifying any trusts which previously exceeded the nil rate band and are therefore still likely to exceed the threshold for a 10-year charge.
• Current value of the trust - Not all trusts need to file a return at the 10th anniversary. A key area to check is the current value to see if 80% of it exceeds the available nil rate band of £325,000 (less any chargeable lifetime transfer in the seven years prior to the trust start date). Make sure all distributions made in the last 10 years are added back in when doing this calculation to establish if the 80% threshold has been breached.
• Residency of trustees - If a trustee has lived overseas at any point in the last 10 years, then the trust needs to be reported to HMRC (regardless of whether any tax is due).

To help advisers through the 10 year review process we have developed a 'Discretionary Trust Tax Calculator'. This will prompt advisers to enter key information relating to the trust to calculate if any tax charges are payable.

This information includes:

• the value of the trust fund the day before the ten year review, PLUS
• the historic value of any related settlements (other discretionary trusts created on the same day by the same settlor), PLUS
• the value of any addition made to another trust created by the same settlor on the same day as an addition to this trust (same day addition), PLUS
• any distributions that gave rise to an exit charge in the past ten years,
• LESS the current nil rate band at the time of the review less any previous chargeable transfers in the seven years prior to creating the trust (subject to a minimum of £0).

If a periodic charge is payable, the trustees will need to complete HMRC’s IHT100d and supplementary forms to HMRC and pay the tax due. These forms may also be required where no tax is due (see point 1).

Calculating how much tax is owed, if any, again is a great opportunity to provide real value, and can lead to further advice opportunities.

The 10-year review point is a good time to check if the trust is still required. It might be the time to discuss winding up the trust prior to the periodic charge if it has served its’ purpose. If there was no initial charge on creating the trust, there will be no exit charges on distributions from the trust before the 10- year review. However, careful consideration of the chargeable events position must be given where the trustees own a bond.

If the trust is still needed, and if there is a periodic tax charge due, the adviser can then advise on how the trustee should make the payment in the most tax efficient way.

If the asset held within the trust is a bond, the most effective way for the trustee to pay the tax due could be to utilise any unused 5% tax-deferred withdrawals. However, if the amount exceeds the cumulative 5% allowance then the encashment that the trustee makes from the bond could result in an income tax liability for the settlor based on the chargeable gain.