A&M Trust query

Trusts Discussion
1

Hi all

I was wondering if someone might be able to help me with an A&M trust query.

The settlement was made June 1997 and was an A&M trust at the time (initial value was £10). The beneficiaries are the Settlor’s two children who would receive the capital at 25. First child, A (born 1984) and the second child, B (born 1985).

I understand that the trust was an A&M trust until 6 April 2008 and then it fell into the discretionary trust regime. The trust assets were treated as “relevant property” as the trustees did not change the terms of the trust. I also gather that there was no principal charge in June 2007 because the trust assets were not within the relevant property regime at that point.

Two distributions were made in 03 (£200,000) and 06 (£342,000) and the value of the trust assets were worth £203,900 in June 2017 (I don’t know the values of the trust pre-2013). I think that a ten year exit charge and a principal charge would apply on June 2017. Is this correct?

I have tried to calculate what I think would be the exit charge below:-

Exit charge calculation in June 2017:-

Trust assets in April 2008:- ?? (Assume 1 million)

Nil rate band:- £325,000

Less chargeable distributions

10 years before June 2007:- £542,000 (£200,000 to child A in 03 and £342,000 to child B in 06)

• 1,000,000 less NRB = £675,000
• £675,000 plus £542,000 = £1,217,000 (add the chargeable distributions)
• £1,217,000 @ 20% = £243,400
• Effective rate: 243,400/1,000,000 x 100 = 24.34%
• Actual rate: 24.34% x 30% x (40 – 3)/40 = 6.754%
• Exit charge in June 2017 was £36,606.68, the chargeable distributions (£542,000) x the actual rate (6.754%)

Quarters June 2007 to June 2017 = 40
Quarters June 2007 to April 2008 = 3

I’m trying to work out what IHT was due when, on what basis, and what the assets were at the relevant time and how much is payable. Also how much IHT will be payable if the trustees were to distribute everything now.

Any help or guidance would be greatly appreciated.

Many thanks.

Sophie Walshe
Waddington Turner Wall

2

Sophie

Apart from it being a 10 year anniversary, what happened in June 2017 that prompts you to ask if both an exit charge and 10 year principal charge are due at that time?

On the basis you have stated the beneficiaries “receive the capital at 25” and this a former A&M trust, then it would appear to be an 18-25 trust, where the normal relevant property IHT rules are disapplied. In such a case there would be no 10 year anniversary charges, only exit charges. The trust would also have ceased to exist after 2010, when the youngest beneficiary attained 25, so would thereafter appear to be being held on bare trusts for them. Exit charges would have been due in 2009 and 2010 when each beneficiary attained 25, using the number of complete questers from attaining 18 to the date of exit (max 28).

If you did not mean that they get the capital absolutely at age 25, then it is an ordinary relevant property trust after April 2008. So, if the trust still existed at its 10 year anniversary in June 2017 there would be no IHT since you have stated the value of £203,900 is below the IHT threshold. If the trust was wound up in June 2017 before the 10 year anniversary then your exit charge calculations are wrong - the chargeable distributions are only added for the purpose of calculating the rate, which can never be more than 6% (but could be less), not the value to which the rate is applied - and then that rate is also pro-rated down as there will be less than 40 complete quarters between April 2008 and whenever the exit date is. £203,900 x 6% x 37/40 (assuming no free NRB) = £11,316 (approx.).

Maxine Higgins
Citroen Wells