Exit Charge - will trust appointment after 2 years

Trusts Discussion
1

A discretionary trust was created on death in Sept 2022 - one of the remaining trust assets is a property valued at £525,000, which the trustees might not wish to dispose of before the 2nd anniversary. If the property is disposed of after 3 years, valued at £550,000, does the NRB reduce the value of the disposition to £225,000 divided by 40 quarters (£5,625) x 4 quarters (since date of death) (£22,500) x 6% £1,350?

And what if the trust fund was actually worth £600,000 due to other assets within the trust fund, but only the property was disposed of?

2

Presumably no failed PETs or CLTs in seven years prior to death and one NRB available?

What was value of estate on death?

If distribution made three years after death that’s 12/40ths.

Malcolm Finney

3

Net estate £3,151,598; charity exemption £300,000 - total chargeable estate £2,851,598;

Failed CLT of £323,755; transferable NRB £156,956

value charged to tax £2,693,397

4

Using the figures in your last post I calculate the “Effective rate” to be 18.22%; “Settlement rate” 5.46% and the actual rate of charge 1.68% (based on 12/40ths).

Applying 1.68% to 550k gives IHT of 9,240.

Malcolm Finney

5

My figures come out slightly different - possibly due to the number of decimal places/rounding - i.e. 18.12% effective rate; 5.436% settlement rate; prorated 1.63% - but in principle I agree with Malcolm.
Unless the donee is paying the tax this would normally have to be grossed up, except where this is a final distribution after which the trust terminates, when there is no grossing up.
Maxine
TC Citroen Wells

6

Thank you Malcolm and Maxine - very much appreciated.

7

Unfortunately, my effective rate figure does not marry up with your figures - could you please let me know if I’m using the correct figures:

Net estate £3,151,598 less available NRB/TNRB £158,201 = £2,993,397 x 20% = £598,679.40 divided by net estate £3,151,598 x 100 = 18.996%

8

Just did quick back of envelope calculation (which seems to differ from my earlier post which gave effective rate of 18.22%).

IHT on death estate:
40% x [2,851,598(net estate) - (325,000 + 156,956)NRB +TNRB] = 947,856

Value relevant property/hypothetical chargeable transfer:
2,851,598 - 947,856 = 1,903,742

Previous seven year chargeable transfers:
323,755 (CLT)

[1,903,742 - [325,000 - 323,755]] x 20% =
1,902,497 x 20% = 380,499

Effective rate:
380,499/1,903,742 = 19.98%

Malcolm Finney

9

Thank you for setting it out Malcolm