TrustsWillsRelevant Property Trusts – The Basics

There are a number of different types of trusts that can be created for inheritance tax purposes. Relevant property trusts are a common type of trust, and it is important to understand what they are and the tax effects that apply to them. This week’s article will cover an introduction to relevant property trusts and their inheritance tax regime. It is not intended as a complete guide to relevant property trusts. The charges that apply can be complex and in practice financial advice is often needed to calculate the charges.

What is a relevant property trust?

A relevant property trust is a trust which does not qualify for any other tax treatment. This includes trusts which are not:

• Qualifying Interests in Possession
• Trusts for bereaved minors and young persons
• Charitable trusts

Discretionary trusts are the most common type of relevant property trust.

The trust assets of a relevant property trust are not treated as part of the beneficiaries’ estates for inheritance tax purposes. Instead, relevant property trusts are subject to their own inheritance tax regime known as the relevant property regime.

There are three types of charges that apply to relevant property trusts, entry charges, exit charges and an anniversary charge.

Entry Charge

When assets enter a relevant property trust an entry charge of 20% is triggered on any value above the nil rate band available to the person gifting to trust. There is no entry charge payable when assets enter a relevant property trust on death, as those assets will be taxed as part of the deceased’s estate.

Exit charge

This is a charge on a reduction in value of the trust fund of a relevant property trust. It will be charged in two circumstances:

1. When trustees distribute assets (unless assets are distributed to another relevant property trust)
2. Assets cease to be relevant property but are still held in trust, for example the trustees make an appointment that qualifies as a disabled person’s interest.

The charge is based on the number of quarters that have elapsed since the trust’s creation or since the last 10 year anniversary of its creation. There are no charges if the trust is below the nil rate band.

Exit charges only apply to trust capital and do not apply where income is distributed to a beneficiary, however this may give rise to income tax charges.

Anniversary Charge

This is a charge on the value of the trust fund at each 10 year anniversary of when it was created. It is a charge of the percentage of the value of the trust at the 10 year anniversary. The calculation for this can be complex but it can never exceed 6%. There will be no charge if the trust capital is below the nil rate band.

The basis of anniversary charges is that it should approximately produce the same amount of inheritance tax as if assets remained in personal ownership and were transferred once every generation.

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