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Discretionary Trust IHT
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Sterlingtimes
Posts: 2,522 Forumite


in Cutting tax
I read the following: "... discretionary trusts are subject to periodic charges every 10 years and exit charges when assets leave the trust. These charges are calculated based on the value of the trust assets exceeding the nil-rate band".
The settlor died 13 years ago, and the trust is now valued at a mere £100,000. Is the nil-rate band £325,00 in this instance? Is it likely that no IHT would fall due?
The settlor died 13 years ago, and the trust is now valued at a mere £100,000. Is the nil-rate band £325,00 in this instance? Is it likely that no IHT would fall due?
I have osteoarthritis in my hands so I speak my messages into a microphone using Dragon. Some people make "typos" but I often make "speakos".
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Yes.
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I am an Independent Financial Adviser. Any comments I make here are intended for information / discussion only. Nothing I post here should be construed as advice. If you are looking for individual financial advice, please contact a local Independent Financial Adviser.1 -
Sterlingtimes said:I read the following: "... discretionary trusts are subject to periodic charges every 10 years and exit charges when assets leave the trust. These charges are calculated based on the value of the trust assets exceeding the nil-rate band".
The settlor died 13 years ago, and the trust is now valued at a mere £100,000. Is the nil-rate band £325,00 in this instance? Is it likely that no IHT would fall due?
So despite the value of the trust asset being well within the NRB at all times, this does not mean the trust has no obligation to submit a formal IHT 100 at the 10th anniversary. I do wonder why you ask that question if a solicitor is now in the driving seat handling compliance matters?
The requirement to submit IHT returns for discretionary trusts, is a strict one regardless as to whether any tax is actually due. So perhaps the trust was already in default at our last exchange in April thereby triggering HMRC penalties for the late 10 year return which was due 6 month after the anniversary. The penalty is £100 doubling to £200 if delivered between 6 months and 12 months late.
The article below should prove useful if somewhat disturbing reading for you, and anyone else involved in the administration of discretionary trusts.
https://www.bdo.co.uk/en-gb/insights/tax/private-client/iht-for-relevant-property-trusts#:~:text=Filing penalties&text=The penalties for late filing,more than 1 year late
As previously advised there are many tax quirks inherent to discretionary trusts, unfortunately seemingly designed to trap the untutored and unwary. It seems this trust is already in penalty territory, so was this not the first matter addressed by the professional trust adviser or has this been overlooked?
In passing, this trust does appear to be far more trouble than its worth. I did ask the question previously, but is your reason for retaining the trust is so that the trust asset remains outside your own personal estate for iht purposes?2 -
Thank you, poseidon1. The Trust remains far more trouble than it is worth and worries me. I have appointed a solicitor, but he has been slow to act apart from registering the Trust with HMRC. I have also appointed an accountant seeking to claim Private Residence Relief following the sale of the Trust property. I have asked about IHT.
Yes, I am worried about penalties and trying to guess whether there are liabilities, hence this posting. I am trying to do everything correctly.
My mother was given 6 weeks to live in April but has unexpectedly stabilised and is in dire condition in a nursing home. The original intent was indicated in a letter but not in the Trust instrument:
"During [my mother's] lifetime, it will focus on her proper needs and interests in relation to her accommodation, maintenance, care, support and security in her life related to its resources ...."
The Trust did not have cash for my mother's nursing home care until the apartment was sold. Care fees became due in November when the NHS withdrew Continuing Health Care funding.
I do not know whether I should ask the Trust to pay for the care fees out of Trust capital rather than using her resources, which would compromise later beneficiaries. I also do not know whether I can close the Trust while my mother is still alive.
I know the right answer is to appoint professionals (as I have done) and let them handle matters, but the professional world can run very slowly.
P.S. Since posting, I got the solicitor to answer one question: my mother's private funds should be applied for care expenses rather than the Trust's.
I have osteoarthritis in my hands so I speak my messages into a microphone using Dragon. Some people make "typos" but I often make "speakos".0 -
Sterlingtimes said:Thank you, poseidon1. The Trust remains far more trouble than it is worth and worries me. I have appointed a solicitor, but he has been slow to act apart from registering the Trust with HMRC. I have also appointed an accountant seeking to claim Private Residence Relief following the sale of the Trust property. I have asked about IHT.
Yes, I am worried about penalties and trying to guess whether there are liabilities, hence this posting. I am trying to do everything correctly.
My mother was given 6 weeks to live in April but has unexpectedly stabilised and is in dire condition in a nursing home. The original intent was indicated in a letter but not in the Trust instrument:
"During [my mother's] lifetime, it will focus on her proper needs and interests in relation to her accommodation, maintenance, care, support and security in her life related to its resources ...."
The Trust did not have cash for my mother's nursing home care until the apartment was sold. Care fees became due in November when the NHS withdrew Continuing Health Care funding.
I do not know whether I should ask the Trust to pay for the care fees out of Trust capital rather than using her resources, which would compromise later beneficiaries. I also do not know whether I can close the Trust while my mother is still alive.
I know the right answer is to appoint professionals (as I have done) and let them handle matters, but the professional world can run very slowly.
P.S. Since posting, I got the solicitor to answer one question: my mother's private funds should be applied for care expenses rather than the Trust's.
I agree with the advice that your mother's private resources be expended first on costs of her care. Only after her funds exhausted do you turn to trust funds.
As for the ongoing administration and compliance for the trust now that it is in cash form, any deposit interest arising is liable to trust income tax at 45% although a percentage related to the accountant's income fees can be claimed as a deduction against bank interest before arriving at the net tax due.
Since you have an accountant handling Trust CGT and income tax, I see no reason why he has not already dealt with the IHT 100 reporting form for the last 10 year charge.
I see no excuse for this, bearing in mind penalties have already accrued on late reporting. There is clearly no IHT to pay, so with just one single asset to report at a value considerably below the trust's NRB, the form could be prepared and submitted this week. It's not rocket science so see if you can get the accountant to take that worry off your plate sooner rather than later. HMRC won't make a big deal about this once the return is lodged ( they have far bigger fish to fry), but it would be one less matter on the 'to do' list.
Frankly, having reccomended you appoint professionals to take control of these technical matters under their collective wings, I am disappointed that having done so, your chosen professionals appear to be proceeding at less than snails pace. Makes me wonder about the calibre of some of the current professionals operating in the sector I retired from.1 -
poseidon1 said: I am disappointed that having done so, your chosen professionals appear to be proceeding at less than snails pace. Makes me wonder about the calibre of some of the current professionals operating in the sector I retired from.
When I was appointed trustee in 2018, I failed to appreciate that IHT would fall due under (what was) a New Zealand Trust. But ignorance of the law is no excuse.
My near-term plan must be to address the tax situation. When my very ill 96-year-old mother dies, then I can move on to the next step and seek to get the Trust dissolved.
Again, you have given me excellent guidance, for which I am thankful.I have osteoarthritis in my hands so I speak my messages into a microphone using Dragon. Some people make "typos" but I often make "speakos".0 -
Sterlingtimes said:poseidon1 said: I am disappointed that having done so, your chosen professionals appear to be proceeding at less than snails pace. Makes me wonder about the calibre of some of the current professionals operating in the sector I retired from.
When I was appointed trustee in 2018, I failed to appreciate that IHT would fall due under (what was) a New Zealand Trust. But ignorance of the law is no excuse.
My near-term plan must be to address the tax situation. When my very ill 96-year-old mother dies, then I can move on to the next step and seek to get the Trust dissolved.
Again, you have given me excellent guidance, for which I am thankful.
The £3,000 you mention only occurs if there is an actual tax liabilty arising ( this won't arise in your case).
The £3,000 figure is the top tier of a sliding scale which only arises in cases where the late return incurred IHT payable in the range of £100k to £1million, so only applicable to extremely large discretionary trusts which have been negligent in meeting their filing deadlines. So with regard to these penalties HMRC only really concerned with the very 'big fish'.
Hopefully your newly appointed accountant can clear the decks on your technical IHT non compliance in reasonably short order.
With regard to possible mitigation of your £200 penalty, your accountant will hopefully make the point that your case is unusual since as a lay person you could not possibly have known that your appointment as trustee of a foreign created discretionary trust immediately triggered exposure to UK IHT compliance issues. UK created trusts already have a complex web of taxes, foreign trusts with UK beneficaries add a further layer of additional tax considerations.1 -
Sterlingtimes said:I read the following: "... discretionary trusts are subject to periodic charges every 10 years and exit charges when assets leave the trust. These charges are calculated based on the value of the trust assets exceeding the nil-rate band".
The settlor died 13 years ago, and the trust is now valued at a mere £100,000. Is the nil-rate band £325,00 in this instance? Is it likely that no IHT would fall due?I'm a retired IFA who specialised for many years in Inheritance Tax, Wills and Trusts. I cannot offer advice now, but my comments here and on Legal Beagles as Sam101 are just meant to be helpful. Do ask questions from the Members who are here to help.1 -
SeniorSam said:Sterlingtimes said:I read the following: "... discretionary trusts are subject to periodic charges every 10 years and exit charges when assets leave the trust. These charges are calculated based on the value of the trust assets exceeding the nil-rate band".
The settlor died 13 years ago, and the trust is now valued at a mere £100,000. Is the nil-rate band £325,00 in this instance? Is it likely that no IHT would fall due?
There is no estate or probate considerations. This is an ongoing discretionary trust created in New Zealand and imported into the UK resulting in the UK trustee now being burdened with unfamiliar trust tax compliance obligations. These matters are now being addressed on his behalf by newly appointed legal and tax advisers.2 -
poseidon1 said:your accountant will hopefully make the point that your case is unusual since as a lay person you could not possibly have known that your appointment as trustee of a foreign created discretionary trust immediately triggered exposure to UK IHT compliance issues.I have osteoarthritis in my hands so I speak my messages into a microphone using Dragon. Some people make "typos" but I often make "speakos".1
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poseidon1 said:Sterlingtimes said:poseidon1 said: I am disappointed that having done so, your chosen professionals appear to be proceeding at less than snails pace. Makes me wonder about the calibre of some of the current professionals operating in the sector I retired from.
When I was appointed trustee in 2018, I failed to appreciate that IHT would fall due under (what was) a New Zealand Trust. But ignorance of the law is no excuse.
My near-term plan must be to address the tax situation. When my very ill 96-year-old mother dies, then I can move on to the next step and seek to get the Trust dissolved.
Again, you have given me excellent guidance, for which I am thankful.
With regard to the 10 year charge there is no requirement to file a return if the value of the trust is less than 80% of the nil rate band (NRB) which is currently £325,000. So based on the values provided there would be no requirement assuming a full NRB was available to the trust. If the settlor made gifts in the 7 years prior to establishing the trust then these would need to be considered before I could provide a definitive answer. I would also need to consider if there are any special rules applying to a trust created outside the UK.I have osteoarthritis in my hands so I speak my messages into a microphone using Dragon. Some people make "typos" but I often make "speakos".0
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