Ten Year Charge on Nil Rate Band Trust.


Postby portal on Wed Mar 15, 2006 3:01 am

I am getting a bit confused on nil rate band dicretionary trust.

Assuming that there are no distributions, when we get to the first ten year anniversary do I take the value of relevant assets at that date reduce it by the trustees nil rate band and then charge tax at 3/10 x lifetime rate (ie = 6%)?

This then sets the effective rate for any distributions between principle charge dates, but assuming there are none, what happens at year 20 anniversary. Is another nil rate band deduction available again to reduce the value of the fund as at that 20 year date or is the charge then on the full value of the fund?

confused......
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Postby hashman on Wed Mar 15, 2006 3:51 am

Taking a simple case of a seetlement commenced after 26 March 1974 the charge on the 20th anniversary is calculated in the same way by taking the aggregate of -
a) chargeable transfers made by the settlor in the 7 years before the settlement commenced
b) the value of the relevant property immediately before the anniversary date.

You recalculate using the nil-rate band (and tax rates) at the 20th anniversary.

The effect that settlor's transfers within 7 years of setting up the settlement has is forever (or at least until the discretionary settlement ends).
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Postby portal on Wed Mar 15, 2006 3:58 am

Thank you Hashman. This seems too generous to be true which is why I checked.

With regard to the settlor's transfers before setting up the trust, in the case that I have the trust was set up on death and therefore as I understand it the previous transfers do not apply.
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Postby Lee Young on Wed Mar 15, 2006 4:09 am

The PETs and chargeable transfers made by the deceased in the 7 years prior to his death do have a bearing on the IHT charge, exactly as hashman has explained.
Lee Young
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Postby portal on Wed Mar 15, 2006 6:42 am

Are we sure that this is entirely correct. I know that this is most definately the case with Discretionary Trusts set up in lifetime but I thought that in a Nil Rate Band Will Trust set up by the Will and effected on death the Trustees Nil Rate Band Treshold will not be less than the initial value of the fund at death.

This would mean that the exit charges in the first 10 years are at 0% and therefore the seven years prior to the settlors death would not be relevant to the Trust charges (only to the settlors own estate at death etc.

Anybody else have a view on this?
portal
 
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Postby hashman on Wed Mar 15, 2006 7:11 am

It is my understanding that a NRB discetionary trust set up following death operates in the way you suggest - so transfers out within the first 10 year period can be made tax free.

Obviously chargeable transfers and failed PETs in the 7 years prior to death have a bearing on what IHT (if any) is payable on death as Lee Young says. And if the total comes to more than £275k (currently) then there will be no NRB available.
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Postby portal on Wed Mar 15, 2006 7:22 am

ah now I am really confused!

in your first reply you said ...The effect that settlor's transfers within 7 years of setting up the settlement has is forever (or at least until the discretionary settlement ends)....

and Lee Young seemed to agree.

This is the bit I do not agree with necessarily but am so confused I may be easily convinced otherwise!

To make things clearer....I agree that chargeable transfers effect how much if any can be put into the trust initially to mop up otherwise unused NRB however do not think that these have a bearing forever. Indeed they are not taken into account at all at year 10. The value of the fund then will be compared to the full NRB available then and the excess if any will be charged at 3/10 x lifetime rate.

Am I still wrong?
portal
 
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Postby Lee Young on Wed Mar 15, 2006 7:45 am

Portal - I am sorry but you are wrong.

Gifts made within 7 years of death will firstly affect the amount available to the trustees of a nil rate band will trust. EG, if a PET of £100,000 is made 5 years before death, at today's rates, only £175,000 is available to the trustees.

When calculating the 10 yearly/principal charge the calculation one must do is to work out the current value of the "relevant property" (as defined) in the trust and add to that the initial value of any property in a related settlement and the initial value of any "non relevant property" (again as defined) in the settlement. Added to this are the settlor's chargeable transfers in the 7 years before the trust was created and the capital amounts paid out over the last 10 years of the trust (if any).

The calculation is complex.

Sections 64-66 Inheritance Tax deal with this.
Lee Young
Solicitor, Chartered Tax Adviser and Trust and Estate Practitioner


Partner, Frettens LLP
lyoung@frettens.co.uk
01202 491701
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