Exit Charges - from former IIP Trust

Trusts Discussion
1

Hi, I have a trust that was set up on 16.12.1994 as a life interest trust but on the death of the surviving life tenant on 21.12.2016 the income of the trust was payable to the other beneficiaries at the discretion of the trustees and therefore I believe it is a relevant property trust from the date of death (the value of the trust was included in the life tenant’s estate for IHT purposes). Since the date of death there have been a number of capital distributions from the trust and I am trying to establish what the effective rate is in respect of the exit charges arising on these.

My understanding is that the ten year anniversary dates are based on the date the trust was originally set up, i.e. 16.12.2004 and 16.12.2014. However, at these dates there was no relevant property in the trust.

Do I compute the effective rate on the exit charges based on the last 10 year charge on 16.12.2014 (which as there was no relevant property at that date would be nil) or do I treat it as if the trust first came into existence on 21.12.2016. If so do I look at the lifetime transfers in the 7 years prior to the trust commencement in 1994 of in the 7 years prior to death in 2016.

Or am I missing something fundamental?

I look forward to your views.

Martin Denniss
Tax Advisor

2

Martin
My understanding is that this is broken down into stages.
Firstly calculate the effective rate - that is the rate that would have applied on the previous 10 year anniversary (assuming the trust assets were relevant property, although they actually weren’t).
Next that effective rate is reduced pro-rate according to how many complete quarters any property has been relevant property. normally this is mainly used for exit charges, but is also applicable for property becoming relevant property after a 10 year anniversary.
Finally that reduced rate is applied to the capital distribution and grossed up, unless the donee is paying the tax (unusual but not impossible), except on termination of the trust.
There are some useful worked examples in Tolleys.
There is a 6-month filing and payment deadline from the end of the month in which the chargeable event occurred.
Maxine