Taxation of Trusts

Taxation of Trusts

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My client, as settlor, has made payments of approximately £25k every six months towards a Gift Trust Investment Bond for the benefit of his three sons who each have an Interest In Possession.

Following the recent changes to the taxation of trusts, will a further contribution of £25,000 ensure that the full value of the Gift Trust is liable to the exit charge of 6%, above the IHT threshold, and, if so, will this charge be payable from inception of the Trust rather than the date the increment was made?

Peter Broadley

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By User deleted
11th Apr 2006 18:39

Two questions wrapped up in one here, I think
Is the £25,000 within "normal expenditure" rules? If so, then continuing with the gifts will not constitute chargeable transfers in the future, regardless of the trust structure.

That is relevant in computing the IHT which would be payable on any 'exit' charges before the first decennial anniversary of the creation of the trusts, as the 'exit' charge is a function of the 'entry ' rate which continues to be nil

Provided nothing is added to these settlements then nothing changes.
If further funds are added to the settlements a number of consequences flow. the first is that as I read the draft legislation, the trusts become relevant property trusts immediately .
If all three trusts were established on the same day , then by virtue of IHTA 62 the values of all the trusts are aggregated to calculate the decennial charge.
It is the decennial charge which potentially is 6%, but property which only becomes 'relevant property' at some later date only pays a proprtionate charge based on how long before the decennial charge is payable it became 'relevant property'[see IHTA s66(2)].


The exit charge is a proprtion of the last decennial charge, and is never as much as 6%, as it is a n/40 of the effective rate paid at that decennial anniversary. The effective rate will alwys be less than 6% , because of the nil rate band.

In many cases the fees to calculate and agree this will exceed the charge!!

It may be worthwhile not adding anything to the existing policies, which can continue unaffected by the new rules, but replicating the trusts with a new policy or policies, if 'normal expenditur' is in point. Each new trust will for the reasons explained above, bear no entry charge.
The income tax consequences of the existing policies possibly thereby becomeing non qualfying policies will have to be taken into consideration.

Even better, replicate with policies taken out on different days, so that their value is not aggregated one with the other.

That way none of the policies will be so large as to be subject to the new charge., as each will stay below the nil rate band.

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