Discretionary Trust 10 yearly charge

I have been asked to deal with a 10 yearly charge on a Discretionary Trust which has thrown up two interesting points that I need to consider. The Trust assets are an Offshore Bond and a Charge over property worth £x plus RPI.

  1. Deceased died in 2006. The Trust was created by a Deed of Variation in 2007 (before intro of TNRB). The Trust was not registered with HMRC. What is the commencement date for the Trust? On the basis the DofV is retrospective for IHT I would assume 2006 and therefore the re-valuation is in 2016. Any alterative views on this?

  2. When re-valuing the Trust would forum members value the charge at the original sum (on the basis that the charge has not been crystallised) or the original sum plus RPI? Alternatively would forum members treat any increase on the original charge (whenever it is realised) as “income” as opposed to capital anyway?

Views appreciated!

Justin Wallace
Brewer Harding & Rowe

  1.   Where a variation to which s.142 IHTA 1984 applies, s.142 states “this Act shall apply as if the variation had been effected by the deceased”.  The 10-yearly charge is therefore calculated by reference to the date of death.  If the value of the gift had included any transferable NRB, it should be noted that the transferable element only reduces any IHT at the time of death and not on any subsequent occasions for charge.
  2.   I suggest this will depend upon the wording of charge.  If set out as an accretion, I would view it as a capital element.  That HMRC appears to deem any index-linked increase as subject to income tax does not mean it cannot be a capital accretion for IHT purposes (after all, when has logic controlled the taxation of trusts?).  However, if clearly set out as an income element, that should be determinative.

Paul Saunders

With regard to the value of the debt I raised a similar point on the previous version of this forum in 2013. Unfortunately I do not believe it is possible now to access that archive but I was helpfully directed to s166 of the IHTA 1984 which states that “In determining the value of a right to receive a sum due under any obligation it shall be assumed that the obligation will be duly discharged, except if or to the extent that recovery of the sum is impossible or not reasonably practicable and has not become so by any act or omission of the person to whom the sum is due.”

It was felt that this provision would mean that the value of the debt at the 10 year anniversary would include any index-linked increase, unless perhaps the deed contained a waiver provision and one could argue that the trustees would be likely to exercise that waiver. In my case there was no such waiver provision and HMRC agreed, perhaps not surprisingly, that it was the indexed value of the debt that should be included in the IHT100.

I do wonder, though, how many of these 10 year charges have been overlooked or not returned on the basis that the initial value of the debt has not increased. Certainly, the case I had was one which I took over from another firm and they had not submitted an IHT100 at the time of the 10 year anniversary citing that argument as the reason.

Diana Smart
Gordons LLP

Thanks for responses.

Irrespective of how the Trust Deed is worded, if Trustees hold assets “upon such terms as they shall in their absolute discretion think fit”, is there an argument that they can exercise that discretion and simply decide not to charge RPI etc without the need for an express right to waiver?

I think its probably stretching things too far but I have seen this interpretation a number of times.

Justin Wallace
Brewer Harding & Rowe

The holding of assets and a decision to waive a right attaching to an
asset are different actions and I would be reluctant to apply the power
referred to in order to disclaim the index-linked uplift.

The amount of IHT saved on the periodic charge is likely to be somewhat
less than that saved in the estate of the debtor, where it all be at
40%, rather than 6%.

Paul Saunders