We're aware that some users are experiencing technical issues which the team are working to resolve. See the Community Noticeboard for more info. Thank you for your patience.
📨 Have you signed up to the Forum's new Email Digest yet? Get a selection of trending threads sent straight to your inbox daily, weekly or monthly!

Discretionary Trust IHT

Options
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 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

Comments

  • HappyHarry
    HappyHarry Posts: 1,801 Forumite
    Tenth Anniversary 1,000 Posts Name Dropper
    Yes.

    ……..




    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.
  • poseidon1
    poseidon1 Posts: 1,333 Forumite
    1,000 Posts First Anniversary Name Dropper
    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 have reviewed a previous exchange I had with you  back in April this year which I believe culminated in you appointing a solicitor to handle compliance for this Ex New Zealand Trust.

    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?
  • Sterlingtimes
    Sterlingtimes Posts: 2,522 Forumite
    Part of the Furniture 1,000 Posts Name Dropper
    edited 9 December 2024 at 2:05PM
    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".
  • poseidon1
    poseidon1 Posts: 1,333 Forumite
    1,000 Posts First Anniversary Name Dropper
    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.


    My commiserations with the plight you are in.

    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.
  • 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.
    I appreciate your kindness. This is not the accountant's fault since I just appointed him. I expected the solicitor to take the lead and appoint the accountant. I will now write to the accountant explicitly about my failure to report the IHT. It seems that the Trust will incur a substantial penalty (£3000).

    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".
  • poseidon1
    poseidon1 Posts: 1,333 Forumite
    1,000 Posts First Anniversary Name Dropper
    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.
    I appreciate your kindness. This is not the accountant's fault since I just appointed him. I expected the solicitor to take the lead and appoint the accountant. I will now write to the accountant explicitly about my failure to report the IHT. It seems that the Trust will incur a substantial penalty (£3000).

    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.
    Can I offer a bit of reassurance on the HMRC penalties for late submission of the IHT 100 form. At the moment you are on the hook for a basic £200 for a return more than 1 year in arrears.

    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.
  • SeniorSam
    SeniorSam Posts: 1,673 Forumite
    Part of the Furniture 1,000 Posts Combo Breaker
    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?
    Correct, there will be no IHT liability.  If you are the executor, then the estate can be settled quickly and you can obtain guidance by calling the Probate office and they will explain how you del with it.
    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.
  • poseidon1
    poseidon1 Posts: 1,333 Forumite
    1,000 Posts First Anniversary Name Dropper
    SeniorSam 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?
    Correct, there will be no IHT liability.  If you are the executor, then the estate can be settled quickly and you can obtain guidance by calling the Probate office and they will explain how you del with it.
    I think you have misconstrued what this particular thread is all about.

    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.
  • 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. 
    Thank you. I have written to my accountant using the language you used above. 
    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".
  • poseidon1 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.
    I appreciate your kindness. This is not the accountant's fault since I just appointed him. I expected the solicitor to take the lead and appoint the accountant. I will now write to the accountant explicitly about my failure to report the IHT. It seems that the Trust will incur a substantial penalty (£3000).

    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.
    Can I offer a bit of reassurance on the HMRC penalties for late submission of the IHT 100 form. At the moment you are on the hook for a basic £200 for a return more than 1 year in arrears.

    The answer on the IHT is promising:

    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".
Meet your Ambassadors

🚀 Getting Started

Hi new member!

Our Getting Started Guide will help you get the most out of the Forum

Categories

  • All Categories
  • 350.8K Banking & Borrowing
  • 253.1K Reduce Debt & Boost Income
  • 453.5K Spending & Discounts
  • 243.8K Work, Benefits & Business
  • 598.7K Mortgages, Homes & Bills
  • 176.8K Life & Family
  • 257.1K Travel & Transport
  • 1.5M Hobbies & Leisure
  • 16.1K Discuss & Feedback
  • 37.6K Read-Only Boards

Is this how you want to be seen?

We see you are using a default avatar. It takes only a few seconds to pick a picture.