Relevant Property IHT in the first ten years

Trusts Discussion
1

Hi,

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.

  1. 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.

  2. Excess Income trust £1,000,000 settled - no tax paid on settlement. I believe an exit in year 5 would be taxable.

  3. 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.

  4. 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.

  1. 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?

Thanks,

Matthew

2

Your examples 1-4 which I assume are independent and not cumulative seem correct, though on that basis a year 5 exit would have a NRB in calculating the tax payable. The unexpected pitfall in 3 is that the amount settled ignores BPR but the distributed property at year 5 could attract it.

The quirk with 5 is as you indicate when the settlement commenced and thus when the 10 year anniversaries occur.

A delight is what happens if the death benefit is settled into a pre-existing trust:

a) with the same or a different settlor; or
b) having been set up as a pilot trust with no initial trust fund or with one; or
c) which is a pre-March 2006 QIIP trust or post March 2006 IPDI trust.

I have never encountered these other than with the same settlor in a) and either type in b). A pilot trust with no initial trust fund is not completely constituted until the death benefit is paid in so is not registrable on TRS before then and is probably registrable immediately once the death benefits are paid as para 8 Sch 3A does not seem to apply.TRSM23030 does not say otherwise though there seems no justification for that if the types of trusts that HMRC do accept as excluded are compared with it. It obviously is not itself a registered pension trust.

Jack Harper

3

Thank you Jack. Examples 1 to 4 are independent and I’m glad you agree with their premise.

For Example 5, the real life scenario is reasonably straight forward for TRS purposes as the discretionary trust was constituted almost ten years ago.

The amount settled by the pension trust into the discretionary trust was in excess of the nil rate band and the trust has been making yearly capital payments since then. So even with the quirk of the ten year anniversary date being essentially random in relation to the date the funds were added to the trust, the odds are good that at least one of the capital payments was made before that ten year anniversary. And my view was that any capital payments prior to the ten year anniversary would be taxable.