Trust IHT charges
12 December 2022
Key points
- Gifts into relevant property trusts, such as discretionary trusts and post 2006 interest in possession trusts will be Chargeable Lifetime Transfer (CLT)
- The IHT charge will be recalculated if the settlor dies within 7 years of making the gift
- Relevant property trusts may be subject to IHT charges on each 10 year anniversary
- If capital is paid out of the trust there may be an exit charge applied
Jump to the following sections of this guide:
IHT relevant property charges
There are possible IHT charges when money is paid into a relevant property trust such as a discretionary trust, at each 10 year anniversary and when capital is paid out.
This case study highlights how each of these charges are calculated.
IHT on creation of trust
Mrs Green makes gifts of £3,000 each year to use her annual gift exemption. In addition, she made an outright gift (PET) of £200,000 to her daughter in May 2010 and a gift into a discretionary trust (CLT) of £425,000 on 1 April 2011.
| Cumulative transfer* | £425,000 | |
| Nil rate band 2010/11 | (£325,000) | |
| Excess | £100,000 | |
| Trustees IHT liability** | £100,000 x 20% | £20,000 |
* PET can be ignored.
** If Mrs Green pays the tax, the value of the gift is increased by the amount of tax she pays. So, the gift would become £450,000 and the tax payable £25,000.
IHT on settlor’s death within 7 years
If Mrs Green survives the seven years from making the gift, no further tax is payable on the gift itself. However, if Mrs Green died within seven years of making PET and the CLT, IHT is recalculated.
Say Mrs Green died on 2 December 2015. The PET of £200,000 is now chargeable but suffers no tax as it falls within the nil rate band. However, the failed PET reduces the nil rate band that is available to the 2011. chargeable transfer. The IHT payable on this would be.
| Chargeable transfer | £425,000 | |
| Nil rate band 2015/16 | £325,000 - £200,000 | (£125,000) |
| Excess | £300,000 | |
| At death rate | £300,000 x 40% | £120,000 |
| Taper relief (4-5 years) | £120,000x 40% | £48,000 |
| IHT liability on death | £120,000 - £48,000 | £72,000 |
| Tax already paid on CLT | (£20,000) | |
| IHT payable | £52,000 |
IHT exit charge during first 10 years
On 2 April 2018 the trustees distributed a capital sum of £50,000 to the beneficiaries. Therefore 28 complete quarters have elapsed.
| Value of trust at outset* | £405,000 | |
| Remaining nil rate band 2018/19** | £325,000 - £200,000 | (£125,000) |
| Notional transfer | £280,000 | |
| IHT @ 20% | £56,000 | |
| Effective rate | £56,000/£405,000 x 100 | 13.83% |
| Actual rate*** | 13.83% x 30% 28/40 | 2.9% |
| Exit charge | £50,000 x 2.9% | £1,450 |
* The figures of £405,000 is used because the trustees paid IHT of £20,000 at outset. If Mrs Green has paid this tax then £425,000 would be used instead.
** The failed PET has increased the effective rate as it has become a chargeable transfer in the seven years prior to the commencement of the discretionary trust. An exit before the settlor’s death would not have been affected by the PET and so would have had the full nil rate band available.
*** If the trustees pay the tax then the actual rate must be grossed-up.
IHT periodic charge at 10 year anniversary
On 1 April 2021 the trust is worth £675,000
| Value of trust at 10 years | £675,000 | |
| Remaining nil rate band (2018/19) | £325,000 - £200,000 - £50,000 | (£75,000) |
| Notional transfer | £600,000 | |
| IHT @ 20% | £120,000 | |
| Effective rate | £120,000 / £675,000 x 100 | 17.78% |
| Actual rate | 17.78% x 30% | 5.33% |
| Periodic charge | £675,000 x 5.33% | £35,978 |
IHT exit charge after 10 years
On 2 April 2023 the trustees decide to distribute the entire trust fund of £725,000 to the beneficiaries. Therefore, 8 complete quarters elapsed.
The effective rate of IHT is the same as at the 10th anniversary because the nil rate band is unchanged at £325,000. An increase in the nil rate band would reduce the effective rate of an exit after a periodic charge.
| Actual rate of IHT | 17.78% x 30% x 8/40 | 1.07 |
| Exit charge | £725,000 x 1.07% | £7,758 |
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