This article outlines the inheritance tax reporting requirements which may arise when creating and managing a relevant property trust - even when there’s no tax to pay.
A relevant property trust is essentially any discretionary trust or interest in possession trust created by a living settlor since 22 March 2006.
Relevant property trusts are subject to initial and ongoing IHT charges known as entry, periodic and exit charges. Whilst you will most likely be aware of the need to calculate and report these charges, you may not be aware of the circumstances where the trustees will need to submit a return to HMRC even if there is no tax payable.
All our discretionary trusts are relevant property trusts. Any Absolute / Bare trust, including the irrevocable designation, are not relevant property trusts.
A Chargeable Lifetime Transfer (CLT) is the label given to any gift to a relevant property trust. An ‘entry charge’ applies where the cumulative total CLTs made by an individual in a rolling 7 year period exceeds the nil-rate band (currently £325,000). The charge is 20% of the excess over the band when paid by the trustees from the trust fund or an effective rate of 25% when paid by the settlor. See our guide for further details.
A CLT may be reportable, despite being below the nil-rate band. There are two tests, each with two conditions. A trust is not reportable if it can pass one of the two tests.
Both A and B must apply to pass the test:
Condition A: The asset transferred is cash* or quoted shares / securities
Condition B: The cumulative total of all chargeable lifetime transfers over the 7 years before the gift, together with the value of the current CLT, does not exceed the nil rate band - I.e. there’s no entry charge
Where the trust is dated on the same day which Quilter applies the settlor’s premium to the bond, the gift is deemed to be the cash paid to fund the premium. Allowing condition A to be met. HMRC’s guidance can be found here.
Both A and B must apply to pass the test:
Condition A: The value transferred by the chargeable transfer, together with the cumulative total of all chargeable lifetime transfers made in the seven years before the transfer must not exceed 80% of the NRB.
Condition B: The value transferred* by the transfer of value giving rise to the chargeable transfer concerned must not exceed the nil rate band that is available to the transferor at the time the disposal takes place.
*The value transferred is calculated before applying reliefs, such as business relief, agricultural property relief.
Alex’s adviser has recommended making a gift of £325,000 to a discretionary trust using Quilter’s Collective Investment Bond (CIB). He has made no previous chargeable lifetime transfers.
His adviser places an application for the CIB in Alex’s name then send’s Alex’s payment along with a completed trust deed which has not yet been dated. On receipt, Quilter applies the payment which starts the bond. On the same day, Quilter dates the trust on the settlor’s behalf, in accordance with terms of the deed.
This scenario passes Test 1 and no report is required.
Kerry has an existing Collective Investment Bond, valued at £290,000. Her adviser suggests placing it into a discretionary trust would use her available £3,000 annual gift exemption and create a CLT of £287,000. As she has made no previous CLTs, there will be no entry charge.
This scenario fails Test 1:
Test 2 also fails:
Kerry must report the CLT to HMRC.
Use forms IHT100a to report the CLT.
Additional forms
Relevant property trusts are subject to a 10 yearly periodic charge where the value of the trust fund may be subject to a charge of a maximum of 6%. Whilst the calculation can be complex, broadly speaking the charge applies where the value of the trust exceeds the trust’s available nil rate band.
Where a charge applies, the trustees must submit a report to HMRC and pay the applicable tax. For help with the calculation, follow our guide.
Trustees must submit a report to HMRC every 10 years unless all the following apply.
However, can be more complex if the settlor has created other trusts or distributions have already been made to a beneficiary. See our guide for assistance in calculating the notional transfer.
John placed £160,000 into a discretionary trust 10 years ago. The trustees must now calculate whether a periodic charge applies. No payments to beneficiaries have been made and the trust fund is now worth £270,000. John had made no previous gifts before the trust or since. The nil rate band at the 10 year anniversary is £325,000.
The trustees calculate that there will be no periodic charge as the value of the trust fund does no exceed the available nil rate band. However, as the value of the trust fund exceeds 80% of the nil-rate band, they must submit a report to HMRC.
Use forms IHT100D to report the CLT.
Additional forms:
Relevant property trusts are subject to a exit charge when capital leaves the trust - for example, when an investment bond is assigned to a beneficiary. The maximum charge is 6% of the capital value.
Whilst the calculation can be complex, broadly speaking the charge applies if there was an entry charge (for exits in the first 10 years) or if there has been a periodic charge (exits after the first 10 years). For help with the calculation, see our guide.
Trustees must submit a report to HMRC each time capital leaves the trust, unless:
Continuing John’s periodic charge example above…
Following the first 10-year anniversary the trustees decided to make a distribution of capital to a beneficiary.
The exit charge is calculating using the rate applicable at the 10-year anniversary, in this case 0%. Therefore, no exit charge will apply to the trust fund. However, as the value of the trust fund (the notional transfer) exceeded 80% of the nil-rate band at the anniversary, they must submit a report to HMRC for each exit from the trust.
First 10 years - The cumulative total of all chargeable transfers made to the trust and any related settlements.
After 10 years - The notional transfer calculated at the most recent periodic charge.
Use forms IHT100C to report the CLT.
Additional forms:
All UK resident trusts must be registered with HMRC’s trust registration service within 90 days of their declaration, unless covered by an exemption. Exemptions which commonly apply are;
The trust register must be updated within 90 days of any changes to the trust (such as a change in trustees) and any year where the trust has a tax liability - such as an entry, periodic and exit charge.
The trustees are required to provide a proof of registration document when entering a business relationship in the UK - such as appointing a financial adviser, or when opening an account.
We have a step-by-step guide to help with the process.
It’s important for trustees to be aware of their reporting requirements, even where no tax is due. Fines of up to a maximum of £3,000 may be applied for submissions over 6 months after the event. The fine increases where HMRC discovers the error before you!
You’ll need to allow three weeks for an IHT payment reference after submitting an IHT122. To save delays, trustees should consider applying for one when the trust starts, rather than waiting until it’s needed.
The table below provides a high level summary of when a report may be needed.
|
Event |
When to report |
How |
|
Chargeable Lifetime Transfer |
|
IHT100a |
|
Period review |
|
IHT100D |
|
Capital leaving the trust |
|
IHT100C |
The information provided in this article is not intended to offer advice.
It is based on Quilter's interpretation of the relevant law and is correct at the date shown. While we believe this interpretation to be correct, we cannot guarantee it. Quilter cannot accept any responsibility for any action taken or refrained from being taken as a result of the information contained in this article.
