10 Yearly Taxation on Discretionary Trust

In July 2014 £800,000 was placed into a Discretionary Will Trust following the Settlors death, for the benefit of his children/grandchildren/charities.

The Trust Funds have largely been on bank deposit or loaned to some of the beneficiaries (interest free).

Now, in 2023 the Trust Fund is worth approximately £850,000 (an increase of £50,000 over the last 9 years).

In 2024 (within 6 months) the Trust will be 10 years old, and as such due to pay HMRC the 10-yearly Periodic Charge.

The Trustees are aware that this Periodic Charge is “broadly 6%” every 10 years.

The question is, “broadly 6%” of what???

(a) 6% of the entire Trust Fund. i.e. 6% x £850,000 = £51,000 tax.

(b) 6% of the Trust Fund in excess of the nil rate band. i.e. (£850,000 - £325,000) x 6% = £31,500 tax.

(c) 6% of the “growth” on the Trust Fund value over the past 10 years. i.e. 6% x £50,000 = £3,000 tax.

(d) A Periodic Charge of some other amount.

The range of tax outcomes is very wide. Any views of feedback much appreciated

It is ‘broadly’ (b)…assuming the full nil rate band is available, that is, the settlor did not make any chargeable transfers in the seven years before the creation of the trust and there have been no distributions by the trustees in the last 10 years. Of course, the trustees should seek appropriate advice to ensure the correct tax is calculated.

Kind regards.

Ihsan Ali
I Will Solicitors Ltd

The legislation is difficult to understand.

I agree with Ihsan. The “6%” is levied on relevant property at the ten year anniversary [IHTA 1984 s64(1)] where “relevant” property is defined in s58. As Ihsan points out, the calculation allows use of the nil rate band [£325k] where such is available.

Malcolm Finney

The anniversary in question is the10th anniversary of the settlor’s death. So the event date might already be past.

The filing deadline is six months from the end of the month of the 10th anniversary of the settlor’s death.

The answer is probably b) but minus relief for the period between death and July 2014 when the £800K wasn’t relevant property.

Duncan, I don’t understand, as the date of death was July 2014 under IHTA 1984 s83 the 10th anniversary is 10 years from this date?

Malcolm Finney

Malcolm - I think Duncan is pointing out that OP does not expressly say that the settlor died in July 2014. The funds may have only been appropriated at that date. As you say, it is the dod that is important.

Thank you to all that have responded. It is comforting that there is a consensus for Answer (b).

Whilst the Trust received the funds (money) in July 2014, upon Grant of Probate, the settlor died in January 2014. Hence, the initial 10 year anniversary period (based on DoD) is indeed next January.

Wishing all a great weekend.

Andrew, Thanks. I should read more slowly. I note Michael confirmed your thoughts.

Malcolm Finney

Tax is calculated as follows :

Before you calculate the actual tax due, you first calculate the effective rate of IHT

This effective rate is a notional rate of IHT which would be charged on a notional transfer. To calculate the effective rate, use the IHT history of the settlor of the trust. Pretend that the settlor had made a transfer of value equal to the
relevant property in the trust at the 10-year anniversary. This notional transfer is increased by adding on the initial value of relevant property

To calculate the notional tax, use the IHT nil band at the date of this 10-year Charge, currently £325.000

This nil band is reduced by the settlor’s cumulative chargeable transfers. Here, look back at the settlor’s transfers in the 7 years prior to the creation of the trust.

Note do not simply look at transfers made in the 7 years prior to the 10-year charge.

Current value of relevant property at 10-year anniversary ** * A 850,000

Nil band at date of principal charge 325,000

Less: Settlor’s chargeable transfers in 7 years before
creation of trust B) Assume nIL in this example

Less: Distributions by Trustees in last 10 years (C) Assume Nil

Nil band remaining (NBR) = A – B - C 325,000

Notional tax at 20% 105,000

Effective rate: 105,000/850,000 x 100 12.35%

Actual rate: Effective Rate % × 30% 12.35% x 30% 3.70%

Actual tax charge ( Called the principal charge): 850,000 × Actual Rate ( 3.70%) £31,450

Hope this helps .

*** Need to consider if he made any related trusts , and adjust if necessary .

I believe there are some small print rules which you might need to take account of . I recommend you see an suitable accountant who handles trusts !