Ten Year and Exit Charges [IWOV-HJDOCS1.FID4022485]

I know how to make a ten year or exit charge calculation, which I do on a spreadsheet by following published proforma calculations. I currently think Practical Law has the best ones, although I used to use some from Tolleys.

My question is different, and it is this: Can someone explain to me what the POINT of the calculation is?

In particular, what purpose is served by calculating the rate of tax by reference to a hypothetical transfer, rather than (say) having written the legislation in such a way as to simply charge tax on the actual transfer which has occurred.

I’m sorry if the question seems vague or unspecific - it’s just that I normally find maths easier to handle if I understand what it is intended to achieve. Yet in this case I’ve always found the logic a bit elusive.

Are there any good articles, blogs or book chapters which you could recommend to me?

Andrew Jones
Hugh James Solicitors

I’ve always assumed that part of the legislation was written by somebody after 25 coffees or who hated tax advisers of all kinds. I find it virtually unintelligible without worked examples.

Andrew Goodman
Osborne Clarke LLP


The point of the calculation is to reduce the rate below 6% by reducing or eliminating the available NRB amount. The quantum and complexity of the manner of achieving this in law are excessive, in that the draftsman is instructed by people suffering from paranoia. The maximum advantage is self-evidently 6% x £325,000 = £19500. Or its NPV 10 years out. In practice this monumental saving is rarely realised. Most settlors avoid settling more than £325000 to avoid the 20% entry charge. And do so while they have a full NRB available for the purpose i.e. no previous cumulation. The transfer on the day of settlement is ignored in any event. On this basis the hypothetical transfer will be nil. s66 (3)(b) will be nil if under (5)(b) the settlor’s transfers within 7 years of making the settlement were nil. The trust then has a full NRB so that the actual rate of tax will then rise above nil only if the value of the chargeable trust fund exceeds the NRB value at the relevant date.

Why can’t the legislation just say that? Drafting techniques have improved in intelligibility but perhaps “no one has complained before”. HMRC’s usual reaction to any identified anomaly is that it is a hoax. Regrettably too everyone just reads the Manual viz. IHTM 42086 as this is easier, like “Janet and John go to Legislation”. The youngsters would probably make a better job of drafting all statutes.

As a technique for reducing the trust NRB it seems seriously over-elaborate conceptually. The separate heinous offence of creating multiple trusts each with a full NRB has been somewhat suppressed, even among those incorrigibly addicted. In practice I found that 2 or 3 were better than one but that many more caused the client disproportionate grief down the track. “Do you mean I have to pay for 10 tax returns?”

The corollary too is that the settlor’s transfers in the 7 years before settlement have a permanent cumulative effect on the NRB at every subsequent 10 year anniversary. This perpetual effect of the original cumulation seems hard to justify. Why should a chargeable transfer in year 1 affect the rate in year 17, 27, or 67?

The 6% rate is not theologically immutable. The explanation for it in IHTM 42085 is flawed as most avoid 20% on entry and the number of anniversaries is not restricted to 3. Plus there is strangely tolerated outcome on a full distribution before the first 10 year anniversary that the increase in value since commencement escapes charge altogether under s68(5)!

The inevitable problem with reform is it can be two-edged. A simple rate of 6% with no NRB would be unattractive to planners using the typical maximum £325000 gift without any cumulation. In my experience actual rates are often very low. A flat rate of 10% for a maximum of 4 anniversaries, following HMRC’s rationale, would be unpleasant too. It would exacerbate the position of “dry” trusts that cannot fund the charge out of income. None of this excuses labyrinthine drafting. Sometimes it is better to stick with the antiquated, though perhaps not entailed interests, coparceners, and tenancies by the curtesy.

Incidentally, what is a “spreadsheet”?

Jack Harper

I agree the ‘hypothetical transfer’ wording just adds confusion but it is really just the initial/anniversary value of the trust, adjusted to include some extra items (eg same day additions) and to disregard some others (eg assets which have never been relevant property).

Whenever I read the confusing wording of these provisions I find it helpful to keep in mind that, in fact, tax is simply being charged on the value of the actual transfer as you say, but that the rules just include some adjustments to that figure to ensure the end result matches the intention of the tax regime.

Also, I suppose the word ‘hypothetical’ is needed because sometimes (e.g. on 10-year anniversary charges) no actual transfer has occurred to trigger the tax.

Tobias Gleed-Owen