View more on these topics

Anniversary waltz

Measuring the extent of the Chancellor’s attack on trusts in this year’s Budget

Last week, I completed my summary of the way in which the 10-year anniversary charge works. I then cruelly left you hanging on, in a state of high tension, for the example that would bring it all together. Well, wait no longer, here it is.

In October 1996, A, who has already made chargeable transfers totalling 120,000 in the previous seven years, transfers a single-premium life insurance bond valued at 150,000 into a discretionary trust. By October 2006, when the first 10-yearly charge is due, the value of the trust property has grown to 300,000. The sum of 80,000 was paid out to beneficiaries in 1998.

Tax is charged on the 300,000 relevant property then in the settlement as shown in the table (right).

In this example, if the settled property had been a regular-premium term insurance with no surrender value and at the 10-year anniversary the settlor had been in good health, the value of the relevant property would be nil. As the assumed cumulative total did not exceed the nil-rate band, there would be no tax payable.

Having looked at the fundamentals of discretionary trusts, including what is relevant property, the entry charge and the 10-year or periodic charge, I would now like to look at the proportionate charge, which is also known as the exit charge.

A proportionate charge can arise, generally speaking, where property or part of the property comprised in a settlement ceases to be relevant property (section 65(1)(a) IHTA 1984).

Under a loan trust, it is thought that the making of loan repayments will not give rise to the need to consider an exit charge.

Clarification is required in respect of payments to the settlor under a discounted gift trust. If they are payments from property that is not relevant property, that is, property held on bare trust for the settlor, then exit charges will not be relevant.

Aside from this, there are some exceptions to the proportionate charge which are set out in section 65 IHTA 1984. Tax will not be charged:

  • On payments by the trustees of costs or expenses which are attributable to relevant property.
  • On payments which are subject to income tax in the hands of any person.
  • When the event giving rise to the charge occurs within three months of the setting up of a settlement or following a 10-yearly anniversaryl Where property settled by a person domiciled outside the UK becomes excluded property and so is no longer relevant property.
  • On a decrease of value which results only from a bad bargain made by the trustees, provided that there was no intention to confer any gratuitous benefit by the disposition.
  • If the decrease results from the grant for full consideration of an agricultural tenancy.

In addition to these exceptions, there is no proportionate charge when property ceases to be relevant property on becoming:

  • The property of a charity or other exempt body (section 76 IHTA 1984).
  • Held on certain specified trusts for employees (section 75 IHTA 1984).
  • Held on trusts of an approved fund for the maintenance of heritage property (schedule 4, Part III IHTA 1984).

I will look at the measure of the proportionate charge next week.


Scot Eq Protect links with Red Arc

Scottish Equitable Protect has linked with Red Arc offering its care advisory services for people claiming on its group critical illness policy.With immediate effect, anyone who makes a claim on a Scottish Equitable Protect group CI product will receive support from the care advisory service provider. Their immediate family will also receive the services, free […]

Keeping it real

With global economic growth set to continue, the outlook for real estate investment remains positive

Nearly half of banks outsource DM

Direct marketing is outsourced to third party companies by 47 per cent of banks, according to research from data management specialists CDMS. The research looked at senior marketers in the top 1000 firms.

White paper forgets today’s retirees says Alliance Trust Savings

The white paper on pension reform does little for today’s retirees according to Alliance Trust Savings.Head of pensions Hyman Wolanski says: “The plan to restore the link between pensions and earnings from 2012 is a welcome step in the right direction while any move away from means-testing is a boost for those trying to plan […]

Tax avoidance (the fight goes on)

In recent times, we have witnessed high-profile celebrities and sports stars make the headlines for potential tax liabilities on ‘failed’ tax avoidance schemes. We are now used to reading about these individuals, but what about those who advise on such schemes? Read more


News and expert analysis straight to your inbox

Sign up


    Leave a comment


    Why register with Money Marketing ?

    Providing trusted insight for professional advisers.  Since 1985 Money Marketing has helped promote and analyse the financial adviser community in the UK and continues to be the trusted industry brand for independent insight and advice.

    News & analysis delivered directly to your inbox
    Register today to receive our range of news alerts including daily and weekly briefings

    Money Marketing Events
    Be the first to hear about our industry leading conferences, awards, roundtables and more.

    Research and insight
    Take part in and see the results of Money Marketing's flagship investigations into industry trends.

    Have your say
    Only registered users can post comments. As the voice of the adviser community, our content generates robust debate. Sign up today and make your voice heard.

    Register now

    Having problems?

    Contact us on +44 (0)20 7292 3712

    Lines are open Monday to Friday 9:00am -5.00pm