I’m reasonably confident (which could be my first mistake) that I understand this correctly, but I’ve had quite a bit of recent push back from two third parties, so I wanted to check I have not missed something fundamental.
My general simplistic stance is that if you settle over £325,000 into a trust, then you are looking at likely paying IHT on exits during the first ten years if you make them.
So, for the below, assume a trust created in 2015 and an exit of the whole trust in 2020.
Will trust £650,000 settled (no other assets) - the estate had £325,000 NRB and £325,000 TRNB so the estate paid no tax (therefore no tax paid on settlement). I believe an exit in year 5 would be taxable.
Excess Income trust £1,000,000 settled - no tax paid on settlement. I believe an exit in year 5 would be taxable.
Business Property trust £1,000,000 settled - no tax paid on settlement due to BPR. I believe an exit in year 5 would be taxable. However, if the exit was of BPR assets then the tax would be nil due to that relief, but if say the BPR asset had been sold and was now cash, then the cash exit would have tax to pay.
Lifetime trust £331,000 settled - the settlor paid no tax on settlement as they used two years of unused £3,000 lifetime allowance. I believe an exit in year 5 would be taxable.
I am hoping everyone is in agreement with the above four scenarios. But if not, maybe this is where I am missing something.
The below is the scenario where I could anticipate a difference.
- Death Benefit trust £500,000 settled. A member of a pension scheme dies, an existing pension trustee settles £500,000 from the pension trust at their discretion into a Death Benefit trust for the deceased’s loved ones. There will have been no ten year anniversary IHT in the pension trust as it was exempt. The transfer from the pension trust into the Death Benefit trust would also be exempt in terms of IHT. But, I think an exit in year 5 would be taxable - purely based on the amount of £500,000 being settled into a relevant property trust.
Now, I am aware the ten year anniversary date for this kind of trust is sometimes variable as described in IHTM17084 - Pensions: relevant property charges: settlement of death benefits - HMRC internal manual - GOV.UK so year 5 might not be 2020 if the Death Benefit trust was created in 2015. Similarly I’m also aware of the relief available if the assets haven’t been relevant property for the full ten years, but I am trying to keep the example simple. I am wondering if there is perhaps some peculiarity before the first ten year anniversary due to the payment coming from a pension trust which is exempt from tax? Or is the simplistic view correct that if the Death Benefit trust had greater than £325,000 settled into it, there is a good chance of some amount of tax being due if pre first ten year anniversary exits are made?