I am acting for the trustees of a relevant property trust which is approaching its first 10 year anniversary in a few months.
When the trust was created, the value of the assets was more than 80%, but less than 100%, of the nil rate band. The trust fund was invested in an investment bond and various monthly capital withdrawals (within the 5% annual allowance) have been paid to one of the beneficiaries. We have identified that the trustees should have been submitting IHT100s in relation to the payments to the beneficiary, as the value of the investment was more than 80% of the nil rate band (albeit there will not be any tax to pay) and we will address this.
However, we are now considering what to do in light of the upcoming 10 year anniversary. The investment is now worth around £375,000 so there will be a ten year anniversary tax charge and subsequent exit charges if nothing is done.
We are wondering whether or not it would be possible to pay out a sufficient amount to a beneficiary to bring the value of the investment under 80% of the nil rate band before the tenth anniversary. Would this mean that there will be no ten year return required, no 10 year tax charge and no exit charges after the ten year anniversary? Or do HMRC take into account all of the payments to beneficiaries that have already been made, so these will effectively be brought back into account when calculating the ten year charge?
Depending on any other gifts etc, if there was no entry IHT charge, there may not be an exit charge prior to the first 10 year anniversary.
Therefore it may be worth checking on whether a distribution could be made before then.
However, on each ten year anniversary of the start date of the trust the trustees have a responsibility to calculate if a charge applies and whether the trust needs to be reported to HMRC.
On every ten-year anniversary, the trustees will need to compare the value of the trust fund with the level of nil rate band in force at that time.
If the value of the trust fund, plus any distributions of capital to the beneficiaries, in the previous ten years is greater than the available nil rate band on the ten year anniversary a periodic charge will apply.
Current value of relevant property at 10 year anniversary (net of APR/BPR)
Plus Initial value of relevant property in a related trust
Less Nil band at date of principal charge after deducting
Settlor’s chargeable transfers in 7 years before creation of trust &
Distributions by Trustees in last 10 years
Firstly, has the Trust Deed been considered? I have seen a situation like this where the 5% was paid out regularly by the Bond manager but the terms of the trust required a Deed to release capital.
Assuming the releases are valid then they and any other release before the 10 yr anniversary are taken into account in calculating the rate of tax levied on the assets that remain at the 10 yr anniversary.
I don’t fully agree with Francesca’s statement that if there was no entry charge there cannot be an exit charge in the first ten years as a relief could remove the initial charge (BPR etc) but the initial value to the trust is calculated without the benefit of that relief. I assume that is not the case here.
Just straying on a bit of a tangent and picking up the point made by Nigel, I have a situation where a bare trust and an IIP trust up was set up for a minor 8 years ago. The bare trust contained various publicly quoted stocks and shares. The IIP had shares in a private investment company. The minor came of age two years ago and instead of the publicly quoted shares being transferred to the beneficiary, the private company shares were transferred. The client dealt with this himself without taking any advice and has now asked about the tax position. My view is that as the IIP Deed requires release of capital by deed. In the absence of any deed, the fact that the company transferred the shares to the minor is effectively void/a mistake, and hence the shares should be transferred back with no tax consequence. Any thoughts?
There are potential CGT issues on the transfer of the private investment company shares, but asset protection is also a concern.
Thank you very much for all of your replies. To answer Nigel’s specific question, the trustees do have the power to apply capital without the need for a Deed so I am satisfied that the payments have been correctly made.