As some clients appoint friends or family as trustees, there is a risk they
will forget to review the trust when they need to
Those who recommend trusts to clients have a fantastic opportunity to provide more valuable advice at the 10-year anniversary. 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 lies with the trustees to make sure any tax due at that point is reported and paid to HM Revenue & Customs.
If this is not done within six months of the anniversary date, then interest is payable. As some clients appoint friends or family as trustees, there is a risk they may forget to review the trust at the 10-year point.
The following three steps can help an adviser to identify whether a client might need assistance.
1. Identify any trusts that might be subject to a 10-year charge
Checking the date is the first obvious step. However, the following checks will help further identify which trusts need to be focused on:
- Which trusts paid an entry charge? This is a quick way of identifying any trusts that previously exceeded the nil-rate band and are therefore still likely to exceed the threshold for a 10-year charge;
- What is the 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 per cent of it exceeds the nil-rate band of £325,000. Make sure all distributions made in the past 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 per cent threshold has been breached;
What is the residency of trustees? If a trustee has lived overseas at any point in the past 10 years, the trust needs to be reported to HMRC (regardless of whether any tax is due).
2. Calculate if any tax is due
If any tax charges are payable, you must first find out the value of the trust fund the day before the 10-year review. You then add this to the historic value of any related settlements (other discretionary trusts created on the same day by the same settlor).
You further add the value of any addition made to another trust created by the same settlor on the same day as an addition to this trust, and any previous chargeable transfers in the seven years prior to creating the trust.
You must further add any distributions that gave rise to an exit charge in the past 10 years. Finally, subtract the current nil-rate band at the time of the review.
If a periodic charge is payable – or even in some cases where it is not – the trustees will need to complete the relevant HMRC forms.
3. Provide advice to the client and/or trustees
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 before the 10-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, you can then advise on how the trustee should make the payment in the most tax-efficient way.
Gordon Andrews is a tax and financial planning expert at Quilter