10 year charge - discretionary will trust

[graemetax]

Hi all

I am the trustee of a discretionary will trust which was set up in 2002/03 (NRB 250,000).

The deceased made no transfers in the prior 7 years nor are there any settlements set up on the same day by him/his will.

All the property in the trust is relevant property.

Since then, capital has been appointed out of the trust to beneficiaries totalling approx £300,000, leaving £100,000 in the trust.

It is my understanding there are no exit charges where the initial value of the trust was no more than the nil rate band at the time of settlement.

When coming to calculate the principal charge becoming due i am slightly confused however.

I believe I should take the current value of the trust (say 100,000), then deduct from that the nil rate band in force at the time, less any capital distributions which were made in the first ten years "which gave rise to a charge under s65 IHTA".

Should I deduct from the NRB (325,000) the 300,000 of capital distributions, even though tax has not been payable on the exits? I think I should because it is charged, albeit at an effective rate of 0%. Is that correct?

Therefore I think the position should be IHT on 10y/c of:

Current value: 100,000

Less:
325,000
(300,000) (25,000)
75,000

Notional tax 20% x 75000 = 15000
Effective rate: 15000 / 100000 = 15%
Actual rate = 15% x 30% = 4.5%
IHT = 4.5% x 100,000 = 4500.

Winding up the trust, i would then use the effective rate of 15% when calculating exit charges.

Thanks in advance for your help. Presumably if advised correctly we could have just distributed everything prior to the 10y/c and not had any tax to pay at all ?

Kind regards
Graeme

[graemetax]

having looked at this again, i'm pretty confident i'm right - ie deduct distributions in the 10 years leading up to the 10 year charge from the nil rate band and then deduct that from the current value of the property. Happy to be told i'm wrong though.

[maths]

Agreed.

[maths]

Just re-read your post.

Agreed, although if the NRB changes between the tax year of the 10th anniversary and that applying at the time of the exit charge post this date, it will be necessary to recompute the 10 year charge (ie the 15% doesn't apply).

[graemetax]

excellent thanks.