Financial advisers who recommend discretionary trusts to their clients have a fantastic opportunity at the 10 year anniversary to meet with their clients and offer them some valuable advice.
Interest in possession trusts (created on 22 March 2006 or later) and discretionary trusts (known collectively as relevant property trusts) need to be reviewed every 10 years to see if a tax charge is due. The responsibility for making sure any tax due at the 10 year anniversary is reported and paid to HMRC falls to the trustees of the trust.
The 10 year review point is too important to ignore. There will be a small number of trusts that are subject to a tax charge at the 10 year review, which must be paid to HMRC within six months of the anniversary date or interest is payable.
A number of clients will have appointed a professional trustee to manage the trust on their behalf, and they will take care of this responsibility. However, a number of clients will have appointed friends or family members to act as trustees. There is a high chance that either the client, or the friends and family appointed as trustees have forgotten that they have to review the trust at the 10 year point to see if any tax is due.
Proactively contacting clients and/or trustees who may need to report to HMRC, and/or pay a tax charge, is a great way for advisers to demonstrate the value of the service they provide.
Here are three tips to help advisers maximise the opportunity at the 10 year charge point, and to help ensure it doesn’t become a headache for their clients:
1. Identify any trusts that might be subject to a 10 year charge
Checking the date that the trust was established will help identify those trusts that have past, or are approaching, the 10 year anniversary and need to be reviewed. The following checks may help identify which trusts the adviser needs to focus on.
- Which trusts paid any entry charge - This is a quick way of identifying any trusts which previously exceeded the nil rate band and are therefore still likely to exceed the threshold for a 10 year charge.
- Current value of the trust - Not all trusts need to file a return at the 10th anniversary. A key criterion is to check the current value to see if 80% of it exceeds the nil rate band of £325,000. Make sure all distributions made in the last 10 years are added back in when doing this calculation, and remember to take account of previous trusts in the preceding 10 years when establishing if the 80% threshold has been breached.
- Residency of trustees - If a trustee has lived overseas at any point in the last 10 years then the trust needs to be reported to HMRC (regardless of whether any tax is due).
2. Calculate if any tax is due
To help advisers through the 10 year review process we have developed a 'Discretionary Trust Tax Calculator'. This will prompt advisers to enter key information relating to the trust to calculate if any tax charges are payable.
This information includes:
- the value of the trust fund the day before the ten year review, PLUS
- the historic value of any related settlements (other discretionary trusts created on the same day by the same settlor), PLUS
- the value of any addition made to another trust created by the same settlor on the same day as an addition to this trust (same day addition), PLUS
- any previous chargeable transfers in the seven years prior to creating the trust, PLUS
- any distributions that gave rise to an exit charge in the past ten years,
- LESS the current nil rate band at the time of the review.
If a periodic charge is payable, the trustees will need to complete HMRC’s IHT100, IHT100D and supplementary forms to HMRC and pay the tax due. These forms may also be required where no tax is due (see point 1).
3. Provide advice to the client and/or trustees
Calculating how much tax is owed, if any, again is a great opportunity to provide real value, and can lead to further advice opportunities.
The 10 year review point is a good time to check if the trust is still required. If there was no initial charge on creating the trust, there will be no exit charges on distributions from the trust before the ten year review. However, careful consideration of the chargeable events position must be given where the trustees own a bond.
If the trust is still needed, and if there is a periodic tax charge due, the adviser can then advise on how the trustee should make the payment in the most tax efficient way.
If the asset held within the trust is an offshore bond, the most effective way for the trustee to pay the tax due could be to utilise any unused 5% tax-deferred withdrawals. However, if the amount exceeds the cumulative 5% allowance then the encashment that the trustee makes from the bond could result in an income tax liability for the settlor (assuming they are living in the UK) based on the chargeable gain.
Don’t be concerned about calculating the 10 year charge on Discounted Gift Trusts
Discounted Gift Trusts (DGTs) offer the settlor(s) a right to fixed withdrawals throughout their lifetime. As part of the gift is retained, the value attached to the gift is discounted by the market value of the right to receive income, i.e. what someone might pay for that income stream on the open market.
At the 10 year anniversary points, the relevant property within such an arrangement must be valued to establish whether a tax charge is payable. The value associated to the income stream retained by the settlor(s) must be revalued when a periodic charge calculation is due. This is based on an actuarial calculation, and can be provided by the insurer who issued the scheme.
The discounted figure (the trust fund minus the revised discount) simply needs to be included into the Discretionary Trust calculator described above.
New quick reference guide available
To help advisers understand the 10 year charge point, a new quick reference guide has been created by our technical team.