Is Your Trust Approaching A 10 Year Charge?

As a trustee, it is crucial to be aware of significant tax obligations that may affect your trust. One such obligation is the Ten-Year Charge, a form of Inheritance Tax (IHT) levied on relevant property trusts (RPT) every ten years. Understanding the nuances of this charge and preparing accordingly can help mitigate potential tax liabilities.

On each ten-year anniversary of their creation (either the date the trust deed was executed or the date of death if created by a Will), relevant property trusts (RPT) are liable to an IHT charge known as the Principal Charge, or more commonly, the Ten-Year Charge.

Understanding relevant property trusts (RPTs)

It is commonly thought that an RPT is a discretionary trust, but it can include trusts with an interest in possession. A more accurate description of an RPT is any trust that does not fall into one of the following categories:

1. A Trust for a Bereaved Minor
2. An 18 to 25 Trust
3. An Immediate Post Death Interest Trust
4. A Disabled Person’s Trust
5. A Qualifying Interest In Possession Trust
6. A Charitable Trust

Filing obligations and the Trust Registration Service

Historically, HM Revenue and Customs have relied solely on trustees being aware of their obligation to file a return on the ten-year anniversary. However, following the introduction of the Trust Registration Service (TRS), they have started issuing ‘nudge’ letters to trustees of trusts which have recently passed a ten-year anniversary, based on the date of commencement declared on the trust registration.

When is an IHT return required?

Not all RPTs will need to complete an Inheritance Tax (IHT) return for their ten-year anniversary. If the value of the trust’s assets, when combined with the settlor’s previous chargeable transfers and capital trust distributions in the prior ten years, is less than 80% of the Nil Rate Band, no return is due and no IHT would be due. If the value exceeds 80% of the Nil Rate Band but is less than the Nil Rate Band, a return is required but no IHT would be due. If the value exceeds the Nil Rate Band, tax will be payable.

Reporting and payment deadlines

The return and tax due for a ten-year anniversary must be reported and paid within six months of the end of the month of the anniversary.

Potential mitigation strategies

If your trust is approaching its ten-year anniversary, there may be steps that can be taken to mitigate or avoid the possible tax charge. For example:

For trusts set up with assets initially below the Nil Rate Band but now exceeding it, appointing assets out before the anniversary could prevent an IHT charge. Ensure this is the right move considering all factors, not just tax implications.

If the trust holds assets that the trustees believe will qualify for Business Property Relief (BPR), it may be beneficial to review the business assets and activities to ensure the relief will be available in full. Note that if the value of the trust’s share of any BPR assets exceeds 80% of the Nil Rate Band before deducting the relief, the trust will need to complete an IHT return even if no IHT is due because of the relief available. This is so HMRC can review and accept the claim for the BPR.

If the Trust has a non-UK domiciled settlor but there are UK assets held under current legislation it may be possible to move the assets offshore to mitigate the IHT charge arising, but please note, any value related to UK residential properties will remain chargeable whether held directly or via a non-UK situs company.

Actions you can take to plan ahead

1. Review Upcoming Ten-Year Anniversaries: Assess your trust’s position well ahead of the ten-year mark. 
2. Consult a Tax Adviser: Discuss potential liabilities and mitigation strategies with your tax adviser as early as possible.
   
3. Evaluate Asset Value and Composition: Consider the current value of trust assets and possible reliefs or exemptions, such as Business Property Relief.
4. Plan for Reporting and Payment: Ensure timely reporting and payment of any IHT due within the six-month deadline.
5. Monitor Legislative Changes: Stay informed about potential legislative changes that could affect non-UK domiciled trusts and seek advice accordingly.

With pending elections and potential changes in legislation, trustees and beneficiaries should closely monitor developments and seek advice on the impact of any changes, especially for trusts where the settlor is still alive and can benefit from the trust. For non-UK domiciled settlors or beneficiaries, consult your UK tax advisors to understand the impact of any post-election changes on your trust.