Avoiding early 'over stepping' Nil Rate Band Threshold


#1
  1. In August 2016 I set up a Discretionary Trust with two
    trustees and 2 beneficiaries – my children who are currently in their 30’s. Invested
    was a Chargeable Lifetime Transfer of £250k having an initial desire not to
    exceed £325k (IHT Nil Rate Band) by August 2023(7 years of Trust). This was
    perceived to be the most advantageous Tax position and ‘no income’ was planned
    to be taken for beneficiaries or trustees

  2. My perceptions were that;

             -any
    

extraction from Trust (say to trustees) resulted in punitive Income Tax i.e.
45%

-if Trust exceeded £325k then
excess would be subject to a 20% lifetime tax charge, when money was withdrawn
by beneficiaries

-on Tenth anniversary would have
pay 6% on excess above Standard Nil Rate band (whatever it might be then which
as usual tends to be anyone’s guess)

–it might be possible to
‘extract’ some moneys into suitable Tax vehicles for non-beneficiaries e.g.
grandchildren (Junior ISA?). I didn’t get to ‘bottom’ of this and did not believe
would be an issue

  1. Fortunately I have been successful in investments in Fund
    and the £250k is now (July 2018) over £310k(over 20% in 2 years) and so rapidly
    approaching the NRB and could reach in Tax Year 2018/2019 or year after(subject
    to normal caveats on investments , stock markets etc.)

  2. Therefore seeking further information on how do I avoid reaching Nil Rate Bands?

E.g. Can I
create Junior Isa (with grandchildren parents) and siphon money into them
without incurring the relevant tax .How do I declare what I have done in
relevant Tax Returns.

E.g. Any other
Options?

Larry Mccaffery


(andrew.goodman) #2

Many of your perceptions are wrong. I would urge you to take some tax advice but the trust should have been paying 45% income tax on income as it arises so on a distribution (of income) the children should receive a tax credit for this tax paid and pay no additional tax - they may well be due a repayment. If the trust has received dividend income there may be a small additional amount of tax to be paid by the trust - it depends on the particular facts.

There is no income tax on distributions of capital - it should be IHT free as well if before the 10 year anniversary. If you are concerned about the 10 year anniversary but planning to distribute then anyway - you can distribute at 9 years and 364 days on the basis of the original rate so should not pay an IHT exit charge.

Remember that whatever you do after the that must be done by the beneficiaries who receive the monies outright from the trust - not by you or the trust.

I don’t believe there is ever a 20% tax charge on distributions from discretionary trusts. The lifetime (IHT) charge is paid by individuals making chargeable transfers or life interest trusts appointing the fund onto discretionary trusts (which they do not do at high values for obvious reasons).

Andrew Goodman
Osborne Clarke LLP