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Wickenden warns of IHT shock for trusts

Money Marketing tax planning specialist Technical Connection director Tony Wickenden is warning of a trust tax shock.

He says trust arrangements with historical transfers totalling 200,000 on a property valued at 300,000 at the 10-year anniversary could get a periodic inheritance tax bill of almost 13,000 following Budget changes.

He calculates the periodic tax charge for an assumed case where a client has a transfer history of 120,000 accrued during the past seven years.

If exit charges have arisen to the value of 80,000 on payouts to beneficiaries, one can assume a cumulative total of 200,000.

After 10 years, when the first periodic charge is due, if the value of the relevant property is 300,000, then tax is charged on the assumed cumulative total of 500,000 – cumulative total plus assumed transfer of the property value.

After the nil-rate band of 285,000 is subtracted, the 20 per cent tax will be charged on the difference – 215,000, which amounts to 43,000.

Wickenden says the effective rate is the tax on the assumed transfer – 43,000 – divided by the assumed transfer – 300,000 as a percentage, giving 14.3 per cent.

The rate of the periodic 10-year charge is 14.3 per cent multiplied by 30 per cent, equalling 4.29 per cent.

Wickenden says the total tax payable on an assumed transfer of 300,000 is 12,870.

He says: “This is very important to understand because it has put a price on flexibility. If IFAs are prepared to invest the time, there can be good payback. They will look better in terms of their professionalism.”


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