Who would be a trustee?Written on August 24, 2016 by Kirk Rice LLP
Financial Services QuestionsThe Question:
I am a trustee for my nieces and nephews and have been reviewing what we set up in 2009 for them. I see that after 10 years inheritance tax has to be paid to HMRC and I do not remember why. What do I need to know about this?
Kirk Rice LLP answers:
This year is 10 years since the taxation of trusts changed and will mean more trustees face reporting to HMRC and paying inheritance tax on the assets within their trusts. There is a 10 year periodic charge on most trusts. Bare trusts, trusts for bereaved minors, or for 18 – 25 yr olds and those for vulnerable beneficiaries are not affected. I believe your trust is not one of these. Some readers may have life assurance in trust, and as long as the premiums are still being paid these too are not likely to be affected.
The trustees have to report the value of assets, on the day before the 10th anniversary and pay inheritance tax of 6% of the excess over the nil rate band, £325,000. Trustees have to do this and pay the tax due within 6 months of the 10th anniversary of the trust. If there is no tax due, but the trust’s assets (other than cash and stocks & shares) are valued at £260,000 or more, a return is also required. Calculating the excess may seem straightforward, but the trustees will need to know if the settlor created any other trusts on the same day, whether the settlor made any other gifts in the 7 years prior to that day, what has been paid out of the trust in the last 10 years and whether Business Property or Agricultural Relief is available. An accountant would be able to calculate and submit the information to HMRC.
To avoid the 10 year periodic charge you could distribute the whole of the trust’s assets. I doubt for most trusts, whether that action would be considered as acting in the best interests of the beneficiaries. Alternatively, trustees might consider whether investing in assets which qualify for Business Property Relief would be suitable,as the value of these would be reduced by 50% or 100%, and therefore reduce the trusts total asset value. This relief is only available after holding assets for 2 years, so would not affect a periodic charge calculation that is due shortly. Trustees enjoy wide investment powers and are bound by the Trustee Act 2000 to exercise reasonable care and skill when considering investment matters, using diversification and select appropriate holdings to achieve adequate liquidity. A financial adviser would be able to assess your trust and provide investment advice on whether this may be a suitable investment.
Any reader interested in discussing this topic further can telephone Michael Powell on 01344 875000 or email michael.powell@kirkrice.co.uk
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