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Discretionary Trust 10 year charge

Practical Issues
firefly
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Discretionary Trust 10 year charge

#457236

Postby firefly » November 11th, 2021, 9:55 am

When my father died we put the money into a discretionary trust and bought a property for £250,000 which we rented out.

The 10 year anniversary is coming up and hence the 10 year charge.

The questionnaire I have from the solicitor asks for three independent estate agent valuations.

I think the property is worth about £325,000 - but valuations can cost anywhere between 1% -5% of the value, so even at the cheapest 1% x 3 x £325,000 is £9,750 - this seems excessive.At worst 5% x £325,000 x 3 is £48,750!

Has anybody got any experience of obtaining 3 quotes? - this seems over the top to me.

Kind Regards,

Gengulphus
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Re: Discretionary Trust 10 year charge

#457278

Postby Gengulphus » November 11th, 2021, 11:01 am

firefly wrote:When my father died we put the money into a discretionary trust and bought a property for £250,000 which we rented out.

The 10 year anniversary is coming up and hence the 10 year charge.

The questionnaire I have from the solicitor asks for three independent estate agent valuations.

I think the property is worth about £325,000 - but valuations can cost anywhere between 1% -5% of the value, so even at the cheapest 1% x 3 x £325,000 is £9,750 - this seems excessive.At worst 5% x £325,000 x 3 is £48,750!

Has anybody got any experience of obtaining 3 quotes? - this seems over the top to me.

Check with the solicitor about exactly what's wanted, but my experience of getting estate agent valuations is that it's basically a matter of telling an estate agent that you're thinking of selling - what do they think the property is worth? As far as I remember, there was no fee - and if I've forgotten one, it was certainly not thousands or even hundreds of pounds. Repeat with two more estate agents.

Getting a valuation by a professional valuer / surveyor is more expensive and quite likely in the thousands-of-pounds range, but that doesn't sound like what the solicitor is asking for.

Gengulphus

Adamski
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Re: Discretionary Trust 10 year charge

#457357

Postby Adamski » November 11th, 2021, 3:54 pm

Hi, the difference is "appraisal" v "valuation"

An estate agent appraisal should be for free. Give impression you're going to sell to get them on side.

Imo Only if hmrc don't believe the value would you need a formal rics valuation.

firefly
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Re: Discretionary Trust 10 year charge

#457447

Postby firefly » November 11th, 2021, 11:24 pm

Thank You.

I have never experienced the 10 year charge procedure before so it is a good idea to obtain the values on the basis of selling the property which I may well consider.

I am thinking of closing the Trust which I think I can do without an exit charge within a short period after the 10 year anniversary.

I will however probably have to pay CGT and arrange for a conveyance to put the property in my name which will attract stamp duty legal costs etc - I will have to think about the tax implications carefully.

Gengulphus
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Re: Discretionary Trust 10 year charge

#457494

Postby Gengulphus » November 12th, 2021, 8:31 am

firefly wrote:I have never experienced the 10 year charge procedure before so it is a good idea to obtain the values on the basis of selling the property which I may well consider.

To repeat and emphasise something I said in my previous response, check with the solicitor about exactly what's wanted. And to explain why I said that, my previous experience with getting estate agent valuations (*) was to do with assessing my mother's estate, about what value should be placed on her house for Inheritance Tax purposes. I haven't experienced the 10 year charge procedure, so I can't rule out the possibility that HMRC have more stringent valuation requirements for the 10 year charge than for Inheritance Tax - but I'd be surprised if there was any significant difference. And assuming you got the phrase "estate agent valuation" from the solicitor rather than coming up with it yourself, I'd be very surprised if a solicitor used that phrase if the valuation was supposed to come from a formally qualified valuer or surveyor... So the net result is that I'm close to 100% certain that getting the valuations from estate agents as I suggested is what the solicitor wants, but not quite 100% certain - hence my suggestion to check with him or her.

One other point I'll add, prompted by your phrase "obtain the values on the basis of selling the property", is that that's essentially what HMRC want - an asset should be valued on the basis of what it could be expected to sell for in a freely-entered-into contract on the date concerned, between a willing seller and a willing buyer. When asking estate agents for their valuations, it may be worth asking for both what they would recommend putting it on the market for and what they think it might realistically end up being sold for after the usual process of buyers negotiating the price down - both are of interest to someone considering selling, so there's nothing odd about such a request, and it seems to me that the latter is closer to what HMRC want (but that's not a judgement you need to make - just hand the valuations over to the solicitor and leave him or her to know how they should be used).

As regards the further points you raise about actually selling the property, avoiding the exit charge, closing the trust, etc, I agree that you need to consider them but cannot help - these are things I have no real experience or knowledge of. But on the immediate issue of getting the estate agent valuations the solicitor has asked for, that's just a matter of checking with the solicitor that we've understood what he or she wants correctly, and if so, getting on with it - no "considering" needed as far as I can see.

(*) I take Adamski's point about "appraisals" vs "valuations". I don't actually know whether he's right or wrong about that, but I do know that the words "value" and "valuation" came up in the context of my mother's estate, and as far as I remember, the words "appraise" and "appraisal" didn't come up at all. I.e. even if "appraisal" is technically the correct word, I would not be at all surprised to find professionals in the area using "valuation" as an alternative!

Gengulphus

firefly
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Re: Discretionary Trust 10 year charge

#457563

Postby firefly » November 12th, 2021, 12:15 pm

Gengulphus,

Thank you for taking the time and trouble to give a comprehensive reply.

The exact wording from the solicitor documentation is “In the case of property within the Trust ,please include three estate agent valuations as at the date of the Anniversary”

I have a meeting with the solicitor the week after next so I thought I would do as much groundwork and expand my knowledge of this subject before then - otherwise the meeting can be expensive.Your comments on the valuation point are particularly helpful.

On another point, there is accumulated income in the Trust from rents in the form of cash and investments (showing a loss) but reading further I don’t think this is brought into the equation for the 10 year charge.I am hoping this is the case!

The Trust was set up by father before his passing and I am the sole beneficiary and also a Trustee - I think it would have been much simpler and cheaper just to buy the property in my name.I cannot see any inheritance tax advantages as his estate was below the IHT threshold, but there may be an advantage when I come to pass it on.

My idea of closing the Trust may be a non starter!

I am trying to find a worked example on the Internet.

Hopefully all will become clear the week after next - but any other pointers you can give would be helpful.

I will keep you informed.

Kind Regards,

Eboli
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Re: Discretionary Trust 10 year charge

#457704

Postby Eboli » November 12th, 2021, 7:13 pm

The ten-year charge is based upon the value of the settled property comprised in the settlement immediately before the anniversary date. See:

https://www.gov.uk/hmrc-internal-manual ... /ihtm04097

Generally speaking in the case of real property this will be the market value for which the suggestions already made by Gengulphus are quite sound. Your suggested valuation would be passed to the Valuation Office who will generally only query the valuation if it out by more than 10% from that which they assess from actual sales of similar properties around the valuation date in the same area. I doubt that you need to spend the sort of sums you are suggesting

If property comprised within the trust ceases to be such property between the 10 year anniversary dates it is once more valued and is subject to the proportionate charge, which generally is n x 1/40th of the trust rate, where n is the number of complete quarters that have elapsed since the date of the last periodic (10 year) charge and where the trust rate is computed by taking the the last periodic charge as a percentage of the total value of the trust property on which it was levied.

Of course one of the advantages of property being in a trust without any interest in possession is that it will normally not form part of an estate for the main IHT charge. Therefore, you might want to consider how far ending the discretionary trust over some or all of the settled property will effect future main IHT charges on individual estates. Sometimes something far lower than a 6% charge every 10 years can be quite cheap compared with the assume 40% 3 times a century!

Eb.

scrumpyjack
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Re: Discretionary Trust 10 year charge

#457705

Postby scrumpyjack » November 12th, 2021, 7:19 pm

As Executor I got a professional valuation of a property from a chartered surveyor, on the solicitor's advice, and it cost £300 incl VAT. I would guess that your solicitor has in mind free valuations from estate agents (NOT paid for ones) but to get 3 of them to avoid arguments. If you get a paid for valuation from a professional, like a chartered surveyor, you certainly won't need more than one and I would very much doubt HMRC would try to challenge such a valuation.

eisman
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Re: Discretionary Trust 10 year charge

#458005

Postby eisman » November 14th, 2021, 5:30 pm

Firefly wrote:
On another point, there is accumulated income in the Trust from rents in the form of cash and investments (showing a loss) but reading further I don’t think this is brought into the equation for the 10 year charge.I am hoping this is the case!

Unfortunately, your hopes are ill-founded, although I note the IHT manual reference given by Eboli includes the statement: "The official view is that the relevant property does not include undistributed income that has not been accumulated". That statement technically could be true, but it is misleading in that undistributed income can be TREATED as relevant property for certain limited purposes.

Undistributed income that has been held in the trust for more than 5 years at the date of the Ten Year Aanniversary is now treated as 'relevant property' for the purposes of calculating the TYA charge. See:

https://www.gov.uk/hmrc-internal-manual ... /ihtm42166

Note this is only for the purposes of calculating the TYA charge; it does not alter its nature as income. Distribution of accumulated income to you (or any other beneficiary*) will be treated as income with a tax credit at the trust rate, currently 45%.

(* In my experience it would be unusual for a discretionary trust to have only one named beneficiary. Such a trust would normally have other named potential beneficiaries, or a class of beneficiaries, plus an ultimate 'default' beneficiary such as a charity.)

If your income for the tax year (including the gross amount of trust income received) is taxable at rates less than the Trust Rate, you will be able to reclaim the excess tax suffered on the Trust income.

As the amount in the trust tax pool may include tax paid in previous years at less than the current Trust Rate, there may be more cash remaining than can be distributed as income without incurring a further income tax charge. If so, you should limit the distribution to 55/45ths of the amount of the tax pool. (NB if there are dividends within accumulated income, these need separate consideration as the rate of tax may differ)

If you decide to wind up the trust and distribute the property 'in specie' (whether before or after the TYA), this gives rise to an 'exit charge' for IHT purposes. The trust will have its own IHT 'nil rate band' of £325,000 available, so the exit charge or TYA charge may be small, if any.

As the exit event is chargeable to inheritance tax (even if no actual IHT charge arises), capital gains tax holdover relief is available (but must be claimed). You will thus receive the property at the Trustees' base cost and can potentially utilise your CGT annual exemption to reduce the CGT payable on ultimate disposal.

I am neither a lawyer nor profess to be an expert in Stamp Duty Land Tax (SDLT), so I recommend you take proper advice on the following issues (I do have some experience of both issues so I have commented based on my experience).
(1) As you presumably are currently registered as the legal owner of the property (albeit in your capacity as trustee), I would query whether a further transfer of title is required. All that will be changing is beneficial ownership and it seems to me that this can be effected by a simple declaration of trust that you now hold the property as bare trustee. That need not involve much professional cost.
(2) As no consideration is being paid on the transfer of the property out of the trust, I would not expect SDLT to be payable.

mutantpoodle
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Re: Discretionary Trust 10 year charge

#458067

Postby mutantpoodle » November 15th, 2021, 8:19 am

picking up on one small point mentioned above.

surely a discretionary trust which has trustee(s) can distribute funds/assets ''at the discretion of the trustee(s)'' to whoever they might be
hence the need for reliable trustee appointments

or is it / are you suggesting that funds can only be distributed to named benficiary...and only if the trustee decides....or not 'at his discretion?'

and if so...what happens if the named beneficiary dies, or is untraceable?

firefly
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Re: Discretionary Trust 10 year charge

#458254

Postby firefly » November 15th, 2021, 4:47 pm

mutantpoodle wrote:picking up on one small point mentioned above.

surely a discretionary trust which has trustee(s) can distribute funds/assets ''at the discretion of the trustee(s)'' to whoever they might be
hence the need for reliable trustee appointments

or is it / are you suggesting that funds can only be distributed to named benficiary...and only if the trustee decides....or not 'at his discretion?'

and if so...what happens if the named beneficiary dies, or is untraceable?


Thank you I am the named beneficiary - upon my death certain charities will become the beneficiaries.

I am also one of the Trustees.

firefly
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Re: Discretionary Trust 10 year charge

#458263

Postby firefly » November 15th, 2021, 5:11 pm

Eisman and Eboli,

Thank you for your detailed replies and I take your point that my hopes are ill founded regarding the accumulated income having read the manual.This seems unfair as the Trust has already paid 45% tax.

I cannot really see the purpose of the Trust since on my death the monies will be given to charity as a default beneficiary and this is IHT exempt anyway?

You give some helpful advice re the SDLT and CGT holdover relief and this me helps me form my questions for my meeting with the solicitor.

I have been reading extensively about the tax implications of the Trust - the looming 10 year charge has woke me up.For example thanks to Eisman I now understand the tax pool and how the tax credit works.

I will update this thread once I have had my meeting.

Kind Regards,

scrumpyjack
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Re: Discretionary Trust 10 year charge

#458276

Postby scrumpyjack » November 15th, 2021, 5:34 pm

Can't see why you can't just wind it up. My brother and I were trustees of a discretionary trust my father set up in 1976. Eventually many decades later we just wound it up and distributed the assets according to our discretion (that happened to be equally among all named possible beneficiaries). No problem! It owned some land round my grandparents house and we just declared that we held the land as bare trustee equally for the beneficiaries. Not even necessary to sell the land, though we are now in the process of selling the last field.

Eboli
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Re: Discretionary Trust 10 year charge

#458890

Postby Eboli » November 17th, 2021, 7:20 pm

scrumpyjack wrote:

Can't see why you can't just wind it up. My brother and I were trustees of a discretionary trust my father set up in 1976. Eventually many decades later we just wound it up...


A lot would depend on when this was. The rules regarding the IHT special regime on trusts changed dramatically in 2006 so what might have worked before then may not work now.

Also it is not clear from what has been said as to whether this was a discretionary trust subject to the special charging regime or one subject to the interest in possession rules.

This is an area full of traps!

Eb.

firefly
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Re: Discretionary Trust 10 year charge

#459443

Postby firefly » November 19th, 2021, 11:02 pm

Eboli,

Thank you - I have never heard of the special charging regime although I have heard about interest in possession.

I am now searching the Internet to understand this more.

It gets more complicated - and traps await!

Regards,

eisman
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Re: Discretionary Trust 10 year charge

#459625

Postby eisman » November 20th, 2021, 2:59 pm

In response to mutantpoodle's query:
picking up on one small point mentioned above.

surely a discretionary trust which has trustee(s) can distribute funds/assets ''at the discretion of the trustee(s)'' to whoever they might be
hence the need for reliable trustee appointments

or is it / are you suggesting that funds can only be distributed to named benficiary...and only if the trustee decides....or not 'at his discretion?'

and if so...what happens if the named beneficiary dies, or is untraceable?

The appointment of income and/or capital from a discretionary trust is indeed at the discretion of the trustees. However, they must exercise that discretion subject to the terms of the trust deed.

Unless there is a specific power in the trust deed allowing the trustees to add further beneficiaries, they must limit the exercise of their discretion in favour of those beneficiaries (or class of beneficiaries) specified in the trust deed. Hence the comment in my earlier post (marked * in parentheses) regarding the usual nomination of more than one beneficiary.

The nomination of an ultimate default beneficiary (e.g. a charity) in the trust deed is precisely to cover the situation where the principal beneficiary (or beneficiaries) have died.

genou
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Re: Discretionary Trust 10 year charge

#460179

Postby genou » November 22nd, 2021, 8:29 pm

eisman wrote:I
The nomination of an ultimate default beneficiary (e.g. a charity) in the trust deed is precisely to cover the situation where the principal beneficiary (or beneficiaries) have died.


In part. It's mostly there because none of the desired tax advantages accrue if the settlor can possibly benefit from the trust. Failing a destination for the funds, guess what happens if there are no beneficiaries......

Eboli
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Re: Discretionary Trust 10 year charge

#460671

Postby Eboli » November 24th, 2021, 7:30 pm

Firefly noted:

I have never heard of the special charging regime although I have heard about interest in possession.


It might be helpful if I explain:

1. Inheritance Tax is normally a tax on transfers of value made by individuals out of their estates either during their lifetime or on death. The charge is generally on the diminution in the value of the estate of the transferor resulting from the transfer. Most lifetime gifts to other individuals are chargeable only if either the transferor dies within 7 years or if the transferor reserves a benefit over the transfer or dies within 7 years of ceasing any such benefit. This is known as the 'main charging regime'.

2. Certainly trusts give an individual a present right to income or enjoyment of trust property or some of it. Hugely simplified this is referred to as an individual having an interest in possession in the settled property over which the right to income/enjoyment exists. For example, the right to occupy settled property comprising a house, or to enjoy the income from the trustees letting it to a 3rd party, would usually means the individual enjoying the benefit having an interest in possession in the house. Under the main charging regime a fiction exists that treats that individual as if he owned the house. So if and when the individual ceases to have the right to enjoy the house he is treated as making a transfer of value under the main charging regime.

3. The special charging regime applies amongst other things to property that is settled but in which no interest in possession subsists. Under it, IHT tries to replicate a 'fiction' that on average property passes 3 times a century when in direct ownership. And if this were to occur in a chargeable form under the main charging regime, tax would be charged three times at the IHT lifetime rate of 20%, i.e.. 3 x 20% = 60%. The special charging regime 'replicates' this by charging property subject to it every 10 years to a special rate of 6% - the 'periodic charge' (i.e. 10 x 6% = 60%). And to cater for the fact that property will not always be added or leave a settlement on 10 year anniversary dates there is a tax charge that accrues at 1/40th for every 3 months since either the commencement of the settlement or the last periodic charge.

4. The 2006 reforms amongst other things moved the boundary between the main charging regime and the special charging regime by altering what constitutes an interest in possession. Those reforms also withdrew certain advantages that accrued to so-called Accummulation and Maintenance ('A&M') Trusts under which a property was settled in favour of one or more minors who became entitled to at least an interest in possession in the settled property before the age of 25. They also tidied the charging calculations of the special regime.

The above is a highly simplified summary of the structure of IHT, which, in my view, is one of the most complex of all taxes.

Eb.

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Re: Discretionary Trust 10 year charge

#461005

Postby eisman » November 26th, 2021, 12:30 am

genou wrote:
In part. It's mostly there because none of the desired tax advantages accrue if the settlor can possibly benefit from the trust. Failing a destination for the funds, guess what happens if there are no beneficiaries......

I must respectfully disagree.

In this instance the trust was created on the settlor's death, so he could not possibly benefit. For trusts created during the settlor's lifetime, in order to be effective in removing the value of the settled funds from the settlor's estate, any properly drafted trust deed will include a clause specifically excluding the settlor (and indeed his spouse) from benefit.

I stand by my comment that the nomination of an ultimate default beneficiary (in my example a charity) is principally to resolve the issue of what happens to the trust funds if the principal beneficiary has (or beneficiaries have) died, or cannot be identified.

genou
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Re: Discretionary Trust 10 year charge

#461109

Postby genou » November 26th, 2021, 11:32 am

eisman wrote:genou wrote:
In part. It's mostly there because none of the desired tax advantages accrue if the settlor can possibly benefit from the trust. Failing a destination for the funds, guess what happens if there are no beneficiaries......

I must respectfully disagree.

In this instance the trust was created on the settlor's death, so he could not possibly benefit.


The assets would revert to his estate, I think. But we are wandering well off topic.


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