Key takeaways from this article
- Understand which trusts could be liable to a 10 yearly IHT charge
- Recognise the importance of advice at this point
- Understand the differences in the calculations when dealing with our DGT and Lifestyle Trusts
Financial advisers who recommend discretionary trusts to their clients have a fantastic opportunity at the 10-year anniversary to meet with their clients and offer them some valuable advice.
Interest in possession trusts (created on 22 March 2006 or later) and discretionary trusts (known collectively as relevant property trusts) need to be reviewed every 10 years to see if a tax charge is due. The responsibility for making sure any tax due at the 10-year anniversary is reported and paid to HMRC falls to the trustees of the trust.
The 10-year review point is too important to ignore. There will be a small number of trusts that are subject to a tax charge at the 10-year review, which must be paid to HMRC within six months of the anniversary date or interest is payable.
A number of clients will have appointed a professional trustee to manage the trust on their behalf, and they will take care of this responsibility. However, a number of clients will have appointed friends or family members to act as trustees. There is a high chance that either the client, or the friends and family appointed as trustees have forgotten that they have to review the trust at the 10-year point to see if any tax is due.
Proactively contacting clients and/or trustees who may need to report to HMRC, and/or pay a tax charge, is a great way for advisers to demonstrate the value of the service they provide.
Understand what information is needed for calculating a10-year charge on a Discounted Gift Trust or flexible reversionary style trust like the Lifestyle Trust
Both these trusts offer the settlor(s) a right to access the trust fund either through fixed withdrawals throughout their lifetime or annual lump sum entitlements.
With the Discounted Gift Trust (DGT), as part of the gift is retained, the value attached to the gift is discounted by the market value of the right to receive withdrawals, i.e. what someone might pay for that withdrawal stream on the open market. For example:
A gift of £500,000 with withdrawals of 5% of the initial premium (£25,000 per annum) might be discounted by £280,000 leaving a discounted gift of £220,000. This would bring the gift under the Nil Rate Band (assuming no other gifts) and avoid an entry charge.
At the 10-year anniversary points, the relevant property within such an arrangement must be valued to establish whether a tax charge is payable. The value associated to the withdrawal stream retained by the settlor(s) must be revalued when a periodic charge calculation is due. This is based on an actuarial calculation, and can be provided by the insurer who issued the scheme. We make a calculator available online for our DGTs here: Discounted Gift Trust – discount calculator
The discounted figure (the trust fund minus the revised discount) simply needs to be included into the Discretionary Trust calculator described above.
For the Lifestyle Trust, a similar discount does not apply but any entitlements paid to the settlor do not need to be included as distributions within the calculation as these are not subject to IHT exit charges. This is also the case for regular withdrawals paid to the settlor(s) on the DGT. In addition, if any entitlements on the Lifestyle Trust have vested in the settlor absolutely but remain invested within the trust, these do not need to be included within the trust fund value.
The information provided in this article is not intended to offer advice.
It is based on Quilter's interpretation of the relevant law and is correct at the date shown. While we believe this interpretation to be correct, we cannot guarantee it. Quilter cannot accept any responsibility for any action taken or refrained from being taken as a result of the information contained in this article.