Inheritance tax charge reminder for trustees

The Finance Act 2006 (FA) made a number of fundamental changes to the tax treatment of Trusts.

Broadly, these changes took effect from 22 March 2006 which was exactly 10 years ago yesterday.

If you are a trustee, from this year on you will need to be mindful of an inheritance tax (IHT) charge (the “periodic charge”) that could arise on every 10th anniversary from when the trust was set up.

Most trusts created during the lifetime of the person making it established on or after 22 March 2006 are now referred to as “relevant property trusts” unless they fall within certain exceptions. IHT charges can arise on three occasions depending on the net value of the assets in the trust. These are:

  • when assets pass into the trust (entry charge);
  • when assets leave the trust (exit charge); &
  • on every 10th year anniversary from when it was created (i.e. the periodic charge).

Given that we are now 10 years down the line from when the FA introduced the changes, trustees should be considering the periodic charge. The IHT calculation is based on the net value of assets in the trust on the day before that anniversary.

It is important to note that whilst the value of the assets passing into the trust may have been less than the IHT nil rate band at the date the trust was created, the value of the assets are likely to have increased at a greater rate than the nil rate band, particularly as the nil rate band has only increased by £40,000 in the last 10 years. If the value of the trust’s assets exceeds the nil rate band, then the trust will have periodic charge liability in most cases. There are certain exceptions if, for example, the trust assets qualify for some form of IHT relief such as agricultural property relief or business property relief.

Therefore, if you are a trustee, you will need to:

  • ascertain whether the trust is a relevant property trust;
  • determine the value the trust assets and consider if any reliefs apply in order to arrive at the net value of the assets;
  • ensure that any IHT Accounts are submitted within the required timescale set by HMRC; &
  • pay any IHT that is due.

You should carry out the above checklist before each 10th year anniversary so as to determine whether an IHT Account needs to be submitted to HMRC. Penalties and interest will be charged by HMRC for a late return and/or late payment.

For anything further, one of our specialists would be delighted to meet you either in our office or in your own home to talk through your requirements and answer any questions. Please contact us at any time.

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