Taxation Of Trusts - Private Client

Creation inter vivos:

• Transfer = PET

• Only chargeable if the settlor dies within 7 years

• If it became chargeable, the tax would be paid by the trustees out of the trust fund

Creation on death:

• The assets in the trust are treated as part of the property of the deceased

• IHT is charged at the death rate

• Tax would be paid by the PRs out of the estate

• Creation of any lifetime trust = LCT
  (exception: disabled trusts – s.89 IHTA 1984)

• All lifetime trusts are within the relevant property regime

On Creation:

• Chargeable transfer whether trust is created inter vivos or on death

  • an inter vivos transfer to a discretionary trust will be a LCT chargeable to IHT at the lifetime rate (20%)

  • where the discretionary trust is created on death, IHT will be charged at the death rate (40%)

• The tax will be paid by the trustees or by the settlor, depending on the terms of the trust

During the existence of the trust:

• An anniversary charge is levied on the “relevant property” (i.e. the capital plus any accumulated income) in the fund on every tenth anniversary of the creation of the trust

  • rate will be no more than 30% of 20% (i.e. 6%)

• An exit charge is made whenever property leaves the settlement – usually occurs when trust property is appointed to a beneficiary, or when an interest in possession arises in part of the trust property

  • tax is charged on the fall in value of the fund at the trust rate – rate will be no more than 6%

  • no exit charge within 3 months of creation or 3 months after an anniversary charge

On Creation:

• Chargeable transfer whether trust is created inter vivos or on death

  • an inter vivos transfer to a discretionary trust will be a LCT chargeable to IHT at the lifetime rate (20%)

  • where the discretionary trust is created on death, IHT will be charged at the death rate (40%)

• The tax will be paid by the trustees or by the settlor, depending on the terms of the trust

During the existence of the trust:

• An anniversary charge is levied on the “relevant property” (i.e. the capital plus any accumulated income) in the fund on every tenth anniversary of the creation of the trust – rate will be no more than 30% of 20% (i.e. 6%)

• An exit charge is made whenever property leaves the settlement – usually occurs when trust property is appointed to a beneficiary, or when an interest in possession arises in part of the trust property

  • Tax is charged on the fall in value of the fund at the trust rate – rate will be no more than 6%

  • no exit charge within 3 months of creation or 3 months after an anniversary charge