Ten years ago, significant changes were made to the way that most trusts are treated for inheritance tax (IHT) purposes. Up until this time, the periodic and exit IHT charges of the relevant property regime had been limited to fully discretionary trusts, however, the March 2006 Budget extended the relevant property regime to all trusts other than bare trusts, trusts which conferred an ‘immediate post-death interest’ (IPDI) and trusts created for the benefit of certain vulnerable beneficiaries.

Until now, the March 2006 changes have had little practical impact for those creating flexible trusts after that date, with the majority of clients taking care to keep the value of any gifts made into such trusts below their available nil rate band. However, with rising asset values and a nil rate band that has been frozen at £325,000 since 6 April 2009; many trusts will now have to consider reporting obligations and potential IHT liabilities for the first time.

By ensuring that the amount settled is within the nil rate band (taking account of the settlor’s cumulative total), not only is an initial entry charge (of 20% of the excess) avoided, it is also likely that no exit charges will occur in the first 10 years (these being based on the initial value of the trust fund). However, (and bearing in mind that capital distributions made in the first 10 years are factored back into the calculation of the assumed chargeable transfer on which the 10-yearly periodic charge is based), many trusts will find that the value of their fund has increased over the years to the extent that it now exceeds the nil-rate band – with the consequence that they will have an IHT liability at the trust’s first 10-year anniversary.

One possible way of avoiding a charge would be to distribute the trust property prior to the ten-year point, however, for the reason described above, this will only work if the entire trust fund is distributed and that may not be desirable.

It should also be noted that even if trustees do not have an IHT liability at the ten year anniversary, they may nonetheless need to submit an account to HMRC on form IHT100 and IHT100d. If the trust fund comprises cash or quoted shares or securities, there will usually be no reporting requirement unless IHT is due, but where the trust fund comprises other non-cash assets – such as investment bonds – an IHT account will be due if the trust fund exceeds 80% of the available nil-rate band, meaning that in many cases there could be a reporting requirement even if there is nothing to pay.

COMMENT

After 22 March 2016, the incidence of periodic and exit charges – and the need to report to HMRC – will become more common; and given the relatively short filing and payment deadline – just six months from the anniversary date – and the complex nature of the forms and calculations required, trustees and their advisers will need to give thought to the implications of the approaching anniversary sooner rather than later.