10 year charge on Discretionary trust help !

[piper777]

can someone please advise

A discretionary trust was set up by deed of variation on my Aunts death. she was unmarried and lived with her brother also unmarried in a house that they owned as tenants in common. Her half was left originally to her brother, but this half was subjected to a DOV leaving to Niece and Nephew (next of Kin). All assets left by her were below threshold for IHT purposes.THe niece and nephew have left the uncle to reside by himself in the house , and gained nothing in terms of rent etc. .. but have paid half the house insurance as a precaution.There is no money in the Trust just the half house. it is now approaching the ten Year mark when there will be a charge liable. Seeking advice as to whether we should exit the Trust or ways we can redirect the assets./ avoid this 10 year charge. As there is no money in the Trust who is ultimately responsible for paying this charge.??? Any help greatly appreciated.

[jerome.lane]

The Trustees will be liable for the charge. What is the house worth now? It may be possible to distribute assets but CGT and SDLT are likely to apply. I recently advised on a similar situation.

Does the Uncle have a right to stay in the house under the terms of the Trust deed and is he paying rent or a tax charge for the deemed benefit received from the Trust?

[piper777]

thank You Jerome for your reply. I would say that the half in trust is prob worth 400k now and 225k when put in Trust. Yes uncle has right to stay in house as that is what we all wanted. he does not pay rent and we would not want him to. It does also say that Trustees shall stand possessed property until the ultimate date for use and Benefit of the beneficiaries. The ultimate date being the death of uncle or when he ceases to live in property. it also says under distribution ----upon the ultimate date or as soon as practical thereafter my Trustees shall distribute my property ....etc.

Does this mean that it cannot be distributed before ???


grateful any input!

[jerome.lane]

It depends on the deed but if potential beneficiaries are limited, then it always possible to reorganise and avoid the 10 year charge if all the beneficiaries and Trustees agree. You would need to get full professional advice and weigh up losing the IHT benefits the Trust may confer versus the 10 year charges.

[AGoodman]

Are you sure it is currently discretionary? If the trusts give Uncle a right to occupy the property then it might well be an IPDI (immediate post death interest), which is subject to IHT on his death rather than 10 yearly charges.

This won't be the case if it just gives the trustees power to allow him to occupy the property.

If you did distribute before the anniversary to niece and nephew, CGT is likely covered by PPR (i.e. no CGT) and there is no SDLT on a vanilla distribution. It should get rid of the IHT cost but Uncle loses any interest in, and right to occupy, the property.

[Jerome_Lane]

Are you sure it is currently discretionary? If the trusts give Uncle a right to occupy the property then it might well be an IPDI (immediate post death interest), which is subject to IHT on his death rather than 10 yearly charges.

This won't be the case if it just gives the trustees power to allow him to occupy the property.

If you did distribute before the anniversary to niece and nephew, CGT is likely covered by PPR (i.e. no CGT) and there is no SDLT on a vanilla distribution. It should get rid of the IHT cost but Uncle loses any interest in, and right to occupy, the property.

I thought this at first but I think only half the property is in the Trust with restrictions and the other half owned directly by the uncle.

[piper777]

thank you Jerome and Goodman.

Firstly I am sure that it is a discretionary Trust. Secondly Jerome, you are correct it is only half the house that is in the Trust, the other half owned outright by Uncle. can i ask you to elaborate on "it always possible to reorganise and avoid the 10 year charge if all the beneficiaries and Trustees agree. ?? thank you for your interest

[jerome.lane]

thank you Jerome and Goodman.

Firstly I am sure that it is a discretionary Trust. Secondly Jerome, you are correct it is only half the house that is in the Trust, the other half owned outright by Uncle. can i ask you to elaborate on "it always possible to reorganise and avoid the 10 year charge if all the beneficiaries and Trustees agree. ?? thank you for your interest

It is possible to appoint assets out of Trust and seek hold over relief for CGT purposes. SDLT can apply in some circumstances although I doubt consideration will be paid or debt exists. As it stands, there should be no IHT exit charge on numbers provided and assuming no other complications. It is imperative that you seek full advice. You would be losing the potential benefits of a Trust structure for a circa £4.5k 10 year charge although I guess this whole debate is driven by exactly that!

[piper777]

Thank you Jerome ----yes obviously quite complicated and would need to seek legal advice. One last question if u don't mind ---- how did u arrive at the possible 4.5K charge... i was calculating more in the 10K figure ??

again thank you VERY MUCH

[Jerome_Lane]

Thank you Jerome ----yes obviously quite complicated and would need to seek legal advice. One last question if u don't mind ---- how did u arrive at the possible 4.5K charge... i was calculating more in the 10K figure ??

again thank you VERY MUCH

The notional IHT on 400,000 less NRB is £15,000 which gives an effective rate of 3.75% and an actual rate of 1.125%. £400,000 at 1.125% is £4,500. Simples! This is not advice as there's a whole host of factors that could effect the calculation.