- Under a gift and loan trust, any outstanding loan due back to the settlor needs to be deducted from the value of the trust as the trustees have an outstanding liability that needs to be taken into account when calculating the net value of the trust.
- For a discounted gift trust, if the settlor is still alive, the trustees have an obligation to provide the regular payments to them and the actuarial value of this commitment should be deducted from the value of the trust.
When looking at what distributions need to be factored into the periodic charge calculation, these refer to the distributions to beneficiaries.
If the trust allows reversions back to the settlor and these are correctly carved out in the trust at outset, they will not be treated as distributions (for example, discounted gift trusts and flexible reversionary trusts).
Likewise, neither will any loan repayments made to a settlor under a gift and loan trust be treated as a distribution.
Whether a 10-yearly anniversary IHT charge is payable or not, the reporting requirements apply where the value of the trust is over 80 per cent of the available NRB (currently £260,000). The trustees may, therefore, have an obligation to report the trust to HMRC even though no tax charge arises.
The trustees then need to consider the NRB available to the trust. The amount available will be the NRB at the 10th anniversary, less any chargeable transfers made by the settlor in the seven years before this trust was created.
From this you can see that the trustees will need to be aware of previous transfers made by the settlor and that these gifts can have an impact for the lifetime of the trust.
Let’s consider an example:
- In January 2013 Lisa made an outright gift of £400,000 to her daughter. As this is a potentially exempt transfer (PET) no tax is payable.
- In January 2017 Lisa sets up a discretionary trust with a gift of £200,000. Lisa regularly used her £3,000 annual gift exemption. This is a chargeable lifetime transfer (CLT).
- As the CLT is below the available nil rate band, no tax is payable.
- Lisa sadly dies in January 2019.
- In January 2027 the trustees must calculate whether a periodic charge is due. The trust value has grown to £250,000 and the NRB has increased to £350,000.
- As Lisa died within seven years of the PET, the PET failed and became chargeable. As the failed PET was £400,000, the available NRB at the 10-yearly anniversary (2027) is zero.
- Therefore a periodic charge will be payable in 2027 on the trust of 6 per cent x £250,000 = £15,000.
