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Discretionary Trust 10 year charge

Practical Issues
bluedonkey
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Re: Discretionary Trust 10 year charge

#461112

Postby bluedonkey » November 26th, 2021, 11:38 am

This thread amply demonstrates why people should have to hit themselves over the head with a hammer before they can set up a trust.

firefly
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Re: Discretionary Trust 10 year charge

#462205

Postby firefly » November 30th, 2021, 11:33 pm

Eboli wrote: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.



Eboli,

Thank you.

You have explained this complex issue with much clarity and I appreciate it.It has greatly aided my understanding.

Regards,

scrumpyjack
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Re: Discretionary Trust 10 year charge

#462237

Postby scrumpyjack » December 1st, 2021, 8:33 am

bluedonkey wrote:This thread amply demonstrates why people should have to hit themselves over the head with a hammer before they can set up a trust.


Absolutely. Governments have long hated any form of trust, even though they have often been set up not to reduce tax but to protect the beneficiaries, and have used taxation to make them ever more unattractive.

The only sort of trust I would ever use (and have) is a bare trust, which is the one form of trust that the taxman does not penalise. All sorts of trusts have been used in the past by my relations and they cause nothing but trouble (and not just tax!).

Parky
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Re: Discretionary Trust 10 year charge

#462239

Postby Parky » December 1st, 2021, 8:38 am

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 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.


If the trust property was valued at more than the IHT exempt amount at the time of the event(now £325000) you should have paid 10 yearly IHT charges every 10years until the discretionary trust was wound up, and capital gains tax plus an IHT exit charge when the discretionary trust was wound up, also the beneficiaries of the bare trust would have to pay further CGT on the sale of the land based on the uplift in value since the wind-up of the discretionary trust. Certainly a problem if the trust property does not include any cash to pay these taxes.

scrumpyjack
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Re: Discretionary Trust 10 year charge

#462247

Postby scrumpyjack » December 1st, 2021, 9:04 am

Parky wrote:
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 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.


If the trust property was valued at more than the IHT exempt amount at the time of the event(now £325000) you should have paid 10 yearly IHT charges every 10years until the discretionary trust was wound up, and capital gains tax plus an IHT exit charge when the discretionary trust was wound up, also the beneficiaries of the bare trust would have to pay further CGT on the sale of the land based on the uplift in value since the wind-up of the discretionary trust. Certainly a problem if the trust property does not include any cash to pay these taxes.


It was worth nothing like that amount. My brother dealt with it and as a partner in an eminent London firm of solicitors was well aware of all the tax and legal issues. Accounts were produced every year for the trivial amounts involved and it really was a complete waste of time!

Gan020
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Re: Discretionary Trust 10 year charge

#462264

Postby Gan020 » December 1st, 2021, 9:41 am

I have only skimmed through the thread.

I note there are a number of well meaning posts giving advice which aren't 100% helfpul because the writer doesn't know your individual tax circumstances, the wording of the discretionary trust or indeed potentially the tax position of your offspring and their further offspring should that be applicable.

You may might this book helpful. I'm sure it will be cheaper on Amazon and tbh you could buy a second hand one from say tax year 2017/18 and it wouldn't make much difference as the tax rules haven't changed much.
https://www.waterstones.com/book/blooms ... 1526518514


You mention you have accumulated income in the trust on which tax has been paid at 45%. The 10 year charge at the first 10 year anniversary will be based on the assets of the trust so the property and the cash held in the trusts bank account, so there is usually a benefit to distributing the accumulated income before the 10 year anniversary.

I am both the trustee and beneficiary of a discretionary trust. The biggest benefit is that I distribute the income to my offspring. They are at university and their marginal rate of income tax is zero percent so they are able to claim back all the tax paid by the trust. Had the settlor (my father) put the assets in my name I would be paying tax at my marginal rate.

Parky
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Re: Discretionary Trust 10 year charge

#462308

Postby Parky » December 1st, 2021, 12:14 pm

Gan020 wrote:
You may might this book helpful. I'm sure it will be cheaper on Amazon and tbh you could buy a second hand one from say tax year 2017/18 and it wouldn't make much difference as the tax rules haven't changed much.
https://www.waterstones.com/book/blooms ... 1526518514



Agree, excellent book.

firefly
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Re: Discretionary Trust 10 year charge

#465404

Postby firefly » December 13th, 2021, 8:24 am

Good Morning.

I have bought the book so starting to read it!

I am meeting with the solicitor this week so I will update the forum on the outcome.


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