I am trying to ascertain whether or not there is an exit charge within the first 10 years on withdrawing funds from a “Bypass Trust”
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The Trust was set up on the death of an individual using his pension lump sum death benefits.
I have conflicting advice as to whether there will be an exit charge. The value was about £900k, and there was no charge entering the trust (as it is a tax free event), however I do not know if I need to do a notional entry calculation to ascertain an exit charge, or whether it is nil.
There was no IHT charge on the funds being paid into the trust, because that is not an occasion of charge (if done within two years of death). However, once in the bypass trust, it is relevant property, so there will be an exit charge, unless, somehow, it qualifies for some other treatment (which is unlikely).
Normally, the start date for the purposes of the ten year cycle for the funds (the “lump sum”) which come from the pension begins on the date the individual joined the pension scheme. That will have been many years before the individual’s death, in most cases. This means that you possibly have two “settlements” for IHT purposes: one comprising the £10 (or other nominal sum) which was used to establish the bypass trust and the other comprising the lump sum. It is normally best to use up the £10 asap, so that you only have one IHT settlement going forward.
Ignoring the £10, the property in the bypass trust only became relevant property when received by the trustees of the bypass trust (as Richard points out). That means that, whether you are, in fact, calculating the IHT on an exit before the first TYA or during a subsequent 10-year cycle, the calculation will need to take into account that that property only became relevant property part-way through the cycle. I found Tolley’s Inheritance Tax helpful when working through the calculations in different scenarios, in particular, how to bring later additions into account.
More and more research I have done is leading to that answer, which I believe to be correct. It is at odds with the financial adviser who has advised the client differently!