It seems a long time ago but in March 2006 there was a major change in the tax treatment of trusts. We are now 10 years on and the additional inheritance tax (IHT) liabilities that were imposed as a result of the 2006 changes will start to become relevant for many trusts and unwary trustees in the next few weeks and months.
In the years prior to 22 March 2006 only discretionary trusts were what are known as “relevant property trusts”. Relevant property trusts were and still are subject to IHT charges on three occasions:
- when assets enter the trust (the “entry charge”);
- when assets leave the trust (the “exit charge”); and
- on every tenth anniversary (the “periodic charge”).
As a result of the 2006 changes all trusts created on or after 22 March 2006 during the lifetime of the settlor (the person creating the trust) with a few exceptions are relevant property trusts.
The result is that until now most of these trusts will have avoided the entry charge and exit charges. In general:
The transfer of assets into a relevant property trust will only result in an IHT entry charge arising if the amount involved exceeds the settlor’s available nil-rate band. In many cases the planning involved will have ensured that no entry charge would have arisen.
If there is no IHT entry charge, then there should no IHT exit charge when assets leave the trust during the first ten years.
However, as the ten year anniversary approaches, even those trusts which have avoided any IHT entry or exit charges to that point will have to consider whether they will need to report to HMRC following the 10th anniversary.
It is possible that for many trusts will the value of their assets will have increased at a greater rate over the past ten years than the nil-rate band, particularly as the nil rate band has been frozen at £325,000 for the bulk of those last 10 years. If the value of a relevant property trust’s assets exceeds the nil-rate band, then the trust will have periodic charge IHT liability in most cases. There may exceptions if for example the trust assets qualify for some form of relief such as business property relief.
Where the value of the assets of such trusts exceeds 80% of the nil rate band the trustees will be required to submit an account to HMRC within 6 months of the 10th anniversary if the trustees are to avoid penalties and then pay any IHT that is due.
Action Points for Trustees
Trustees need to:
1. ascertain whether they have a relevant property trust;
2. value the trust assets;
3. check whether reliefs are available;
4. consider whether they should make distributions from the trust before the 10 year anniversary arises and how this must be done. A deed is usually required;
5. ensure that any returns are submitted within the required timescale
6. if necessary raise funds to settle the IHT that is due
The review needs to be done well before the 10th anniversary to avoid any nasty surprises.
Ian Newcombe is a partner in Stephens Scown’s private client team based at our Exeter office and he and his colleagues based in Exeter, St Austell and Truro can advise trustees on whether their trusts are subject to the periodic charge to IHT and assist with completing the relevant tax return. The fact that significantly more trusts are likely to be approaching their first 10th anniversary than was the case in the past makes planning ahead over the coming weeks and months even more important. If you would like to contact Ian please call 01392 210700 or email private.client.exeter@stephens-scown.co.uk.