Related Contacts
Sam Bilcliff Probate & Personal Tax Manager
View Profile
18th August 2023
Unlike with an absolute gift of the asset, this would be immediately chargeable to IHT and, therefore, additional administration would be required.
The current value of the assets which are to be settled into a trust would need to be obtained and then compared to your available nil rate band. If the value was below this amount AND less than 80% of the value (less then £260,000 currently) no IHT would be payable and no IHT submission to HMRC would be required either.
If either the value being settled exceeded your nil rate band or was more than £260,000 an IHT100 account would be required to be submitted to HMRC within 12 months of the end of the month the trust was created. If any IHT was payable, this would be due within 6 months of the end of the month the trust was created.
The IHT payable, the rate applicable is 20% of the amount exceeding your nil rate band if this amount is to be paid out of the trust funds. If you will also be paying this in addition to the sums settled, the tax rate is equivalent to 25% to show that the trust has received a higher distribution due to you paying the tax owed.
If you survive 7 years from creating the trust, then no additional tax or reduction of your nil rate band available for you estate will occur.
If this is not the case, then the value of the trust at the date the trust was created will be liable to IHT at 40% on the amount exceeding your nil rate band at that point in time. The tax originally paid when the trust was set up will be deducted and therefore only the difference will be payable. This would be reportable on the IHT400 account with the tax payable within 6 months of death.
Every ten years, the trust will be assessed to IHT on the value of the trust’s assets at that date. If the value is above the nil rate bad available at that point, IHT could be chargeable of up to 6% of the value of the trust. This will be reported on a IHT100 with submission within 12 months of the date of charge and the tax payable within 6 months. Again, if the value is more than 80% of the nil rate band but no IHT is payable, a IHT100 is still required but no tax will be payable.
a. Inheritance Tax
An additional IHT reporting requirement and possible tax position could occur if capital/assets are distributed from the trust to one of the beneficiaries absolutely. The reporting requirement will follow that of the last 10 year anniversary charge or if distribution has occurred within the first 10 years, the initial IHT account – meaning, if an IHT account was required and IHT payable previously, then this would apply to this distribution.
The calculation of the tax payable is complicated and is based on the time lapsed between the previous event and the distribution. However, the rate of tax applied will not exceed 6% on the value of the capital leaving the estate.
b. Capital Gains Tax
At the point a Capital distribution is made to a beneficiary, this will also be a chargeable event for capital gains tax purposes if the asset transferred is a chargeable asset for CGT purposes – i.e. shares, property etc. not cash. The trust will be assessable on the gain arising since purchased to transfer. However, as this transaction would also be chargeable to IHT, holdover could be claimed so the trust did not have to the pay the CGT but the gain would become payable when the beneficiary sold the asset. This would effectively mean the beneficiaries base cost for the asset would be the trusts base cost.
Our team can guide you through all aspects of trusts so that you can create a plan for protecting your assets for generations to come. So get in touch today to discuss our probate services and let us help make the process smooth, straightforward, and worry-free.
Other articles in this series:
Income Tax implications: The two main types of trusts
What do I need to consider to set up a trust?
