Periodic charge

Please can someone clarify – I am getting conflicting advice?

Nil rate band discretionary Will Trust. Testator died December 2010. Amount going into trust - £243,000, represented by half share in property and cash. No lifetime gifts in 7 years to death.

In June this year, total value was £331,000, which would produce tax on £6,000 on ten year anniversary.

£40,000 distributed to beneficiaries in June, so trust now valued at £291,000.

One lot of advice says, although value of trust is £291,000, the available nil rate band is £285,000 (£325,000 less the £40,000 distributed), and so there is still tax on £6,000 on ten year anniversary.

Second lot of advice says, since the distribution in June was the only exit from the trust in the ten years and it is the first ten year anniversary of a nil rate band discretionary Will Trust, the distribution reduces the value of the trust below the nil rate band of £325,000, so no tax due on anniversary.

Which is correct please?


Chris Milne
Onions & Davies

At each tenth anniversary you need to establish the value of the trust fund (£291,000) and then the trust’s available nil rate band. From the current nil rate band you need to deduct any chargeable transfers sitting in the seven years before the trust started plus any distributions made to beneficiaries. So, this trust’s available nil rate band is £285,000 (£325,000 - £40,000). Therefore a periodic charge is payable on the excess £6,000. IHTM42000

Kim Jarvis
Canada Life

I believe the former (s.66(5)(b)).

I don’t think there are any special rules regarding the first anniversary. There is a difference in calculating exit charges before and after the first anniversary but that’s irrelevant here.

Andrew Goodman
Osborne Clarke LLP

If relevant property leaves a settlement there is an exit charge. The fact that the charge may be at a nil rate (because it takes place within the first 10 years of creating a settlement within the nil rate band) does not alter that fact. Consequently, the £40,000 must be deducted from the nil rate band, leaving £6,000 chargeable for the purpose of calculating the 10-year charge.

Keith Parkhouse

1 Like

I assume that the surviving spouse is still alive and living in the property, a one half share of which she owns. I also presume that this will trust did not include a provision whereby the trustees could have transferred the half share of the property and the cash to the surviving spouse and take a charge over the property and an IOU for the cash. If it had, then the value of the trust fund would have remained at ‘£325,000 on the 10th anniversary and therefore no tax to pay. To pay out £40,000 to the “beneficiaries“ who I presume were the spouse and children, the surviving spouse could have made a payment of this sum to the trustees (thus reducing the debt to the trust) who could then make payment to the children. Of course the trust does not see any growth through the property or invested cash but the main reason for these types of trusts was to enable the nil rate band to be used on first death prior to the introduction of the transferable nil rate band.

Patrick Moroney