A STUDY IN GIFTING: ‘PERIODIC ISSUES’

Relevant property trusts are subject to inheritance tax (IHT) if the amount gifted, plus other chargeable lifetime transfers (CLT) made in the seven previous years prior to death, exceed the donor’s nil rate band (NRB), currently £325,000. Tax of 20% is payable on any amount in excess of the nil rate band when the gift is made. The tax charge will increase to 40% on death within seven years of making the gift and any failed potentially exempt transfers (PETs) will need to be taken into account. There will be tapering of the tax payable if death occurs between three and seven years after the date of the gift and credit is given for any IHT already paid when the gift was made.

However, this is not the end of IHT incidences that will occur during the life of such a trust. Every ten years, the value of the trust must be assessed to check if any ‘periodic charge’ is due to be paid to HMRC. Generally, a charge of 6% applies to the excess of the trust asset value over the trust’s NRB (currently £325,000 less any other CLT’s made by the settlor in the seven years prior to the trust’s establishment less any capital distributions made in the previous 10-year period).

Discounted gift trusts

What is the calculation basis, however, where the assets are held in a discounted gift trust (DGT)? A discount is usually granted at outset (health permitting) as the regular payments specified in the trust deed must be made to the settlor and will therefore be in the settlor’s estate and potentially subject to IHT.

At each ten-year anniversary, the trust asset value must again be discounted for IHT purposes if the settlor is still living. It will be the market value of the assets reduced by a factor based on the estimated remaining income payments and how much a purchaser would pay at the anniversary for a fund that could not be accessed until an unknown date in the future (i.e. the settlor’s date of death). The outcome of this is that the ten-year anniversary discounts are relatively generous compared to discounts determined when a DGT is established.

These discounts are not calculated using the basis applied at the outset but are based on different assumptions (although any health rating applied in calculating the original discount still applies and does not have to be reassessed). It is the discounted value that is set against the trust’s NRB to see if there is an excess that will be subject to the 6% IHT charge.

Where a DGT discount was determined using our discount calculator, we can assist with the calculation of the ten-year anniversary discounts.

Reporting duties

Once the calculation has been completed, if a charge arises, this must be reported to HMRC on forms IHT100 and IHT100d within six months of the end of the month in which the charge arises.  Note that these forms are still required if there is no charge if the trust asset value is at least 80% of the trust’s NRB. (The requirement to submit these forms applies to all trusts that operate under the relevant property regime.)

If you have any questions or need more information, feel free to contact our Technical Services team on 020 7608 5330 or e-mail technical_direct@integrafin.co.uk.

All information is based on our understanding and interpretation of applicable law and regulation.

 

 

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