'Relevant Property' Trust Periodic Charge (Anniversary Charge and Exit Charge) Calculator - calculate the ten year and periodic liabilities to Inheritance Tax.
This toolkit can be used to calculate anniversary and exit charges for 'relevant property' trusts, and can be used to simulate future scenarios for 'what if' purposes.
The sudden decision in the March 2006 budget to align the tax treatment of 'Interest in Possession' (IIP) and 'Accumulation and Maintainance' (A&M) Trusts with the rules already applicable to Discretionary Trusts means that the seemingly complicated tax treatment suffered by Trustees of Discretionary Trusts may now become a fact of life for other Trustees.
Many packaged IHT products [such as Gift & Loan plans and Discounted Gift Bonds] provided by Insurance companies took advantage of the (relatively) simple tax treatment afforded by IIP Trusts in order to offer investment based IHT planning solutions. Discretionary Trusts tended to be used only when necessary, due to the added complexity involved.
However, now that the same complexity is involved whether a Discretionary or Interest in Possession Trust is used, it is time to accept this complexity is now a fact of life. Therefore, some sort of 'Relevant Property Trust' Tax Toolkit is required to calculate the tax charges involved, but also to calculate different scenarios by project forward future IHT Thresholds and Trust Values - this can be useful when making a decision as to whether such a route is likely to be of any material benefit after the tax consequences have been taken into account.
A Brief overview of Lifetime Inheritance Tax Charges
Many people are unaware that Inheritance Tax can be charged during a person's lifetime. After all, the very name implies that it is a tax that is levied upon death. However, Inheritance Tax (lets abbreviate this to IHT from now on) also targets all transactions that intentionally reduce the value of an individuals estate during their lifetime. Common examples are Potentially Exempt Transfers, which can be brought back into the IHT calculation if the donor dies within seven years - i.e. you give away £300,000 to your children, then die two years later. In such a situation, the whole of this value would be brought back into the equation and added to the value of the estate for IHT purposes. See the document on IHT
for a more general overview of IHT Planning.
However, Lifetime Transfers fall into a special category of their own. These are transfers that are not 'exempt' or 'potentially exempt' - effetively this is an arbitrary category, which includes Discretionary Trusts, but now also IIP and A&M Trusts [although some A&M Trusts still escape this treatment].
Like Potentially Exempt Transfers, Chargeable Lifetime Transfers accumulate on a seven-year basis, after which fall out of the equation. However, should the total of all Chargeable Lifetime Transfers exceed the current nil rate band (currently £325,000), then the excess over the nil-rate band (plus annual exemptions) will be taxed immediately at a rate of half the current 'death rate' (currently 20%). This is why in general, most chargeable transfers in Discretionary Trusts have been below the current nil-rate band. OK, this is the easy part.
The main complication lies in the Trustees will also face an 'anniversary charge' after 10 years, then 'exit charges' when capital leaves the trust and reduces the value of the Trust Property. We will firstly look at the anniversary charge, as the effective rate of tax charged at the ten-year anniversary will also be applied.
The calculation of the anniversary charge is worked out by deducting the IHT Threshold at the anniversary date from the value of the trust property (plus any previous lifetime transfers in the seven years before the start date and any capital withdrawals from the trust). If this amount is greater than zero, the lifetime rate of 20% is applied to it. However, at this point, a separate calculation may have to be done in respect of previous lifetime transfers and previous capital withdrawals (these are added together and the nil-rate band is subtracted from the total. Tax at the lifetime rate is applied to any amount over zero.) Any tax due on this amount is subtracted from the first calculation, and the actual tax paid is 30% (3/10ths) of this amount.
From the calculation comes the common misconception that tax is applied at the rate of 6% (30% of 20%). In fact, it is not normally this high, and depends on multiple factors, such as the growth in the value of the trust property over and above the rise in the IHT Threshold, and any previous lifetime transfers and withdrawals that are brought into the equation.
Therefore, if a ten-year anniversary falls in the year 2016, and the value of the trust property is £700,000 and the IHT Threshold is £450,000, the calculation will be:
£700,000 - £450,000 = £250,000
This gives an 'anniversary rate' of 2.14%
Previous Lifetime Transfers and Exit Charges
The above calculation has been done on the simplest basis, assuming no previous lifetime transfer or capital withdrawals in the first ten years. In many cases, this will be the case. However, in other cases, things are not so straightforward. Because Lifetime Transfers may have been taxed separately, and because a capital withdrawal will have already faced an exit charge, these cannot be taxed twice (this would be double taxation). Therefore, whilst they are brought into the equation when doing the initial calculations, they are then calculated separately and deducted from the total amount before calculating the final amount of tax due. An example, using the same figures as above, but assuming a previous lifetime transfer of £300,000 in the year before this transfer took place, and assuming a capital withdrawal of £250,000 was made to the beneficiaries of the trust in year 5, is outlined below:
£(700,000 + 300,000 + 250,0000) - £450,000 = £800,000
£800,000 x 20% = £160,000
Take into account previous transfers + withdrawals, and set them against their own nil-rate band:
(£550,000 - £450,000) = £100,000
£100,000 x 20% = £20,000;
Deduct £20,000 from £160,000 = £140,000
This gives an 'anniversary rate' of 6%
If you are starting to find this complicated - well this is the precise reason why we felt a toolkit covering this area was necessary.
Exit Charges after the anniversary charge
OK, assuming no withdrawals are made from the trust. Everything will drift along to year twenty, when another ten-year charge will be applied.
However, if any capital withdrawals are made, these will be taxed individually using the 'anniversary rate' derived from the calculations above. These are worked out based on the number of complete quarters since the previous ten-year anniversary. Therefore if a withdrawal of £100,000 is taken exactly 3 years after the anniversary rate, 12 complete quarters will have passed since that point. Therefore, the calculation is:
Calculation 1): 12/40 x 2.14% x £100,000 = £642
Calculation 2): 12/40 x 6% x £100,000 = £1,800
Exit Charges during the first ten years
If capital withdrawals were made during the first ten years (which some people adopt as a strategy to avoid a huge tax bill at year ten), then because there is no 'anniversary rate' to apply, these have to be calculated on a different basis.
In such an instance, the notional rate of IHT is calculated by taking the amount of immediate IHT chargeable upon entry (if any), then calculating it proportionately based upon the number of quarters since the creation of the trust.
An important point to note is that the 'exit charge' rate is calculated upon the nil-rate band at the date of the capital withdrawal, not the date of the initial lifetime transfer. Effectively, a notional rate is calculated based upon the lifetime transfer (even if it has already been taxed at the lifetime rate), the number of quarters since that date, and the size of the withdrawal / distribution.
If there was no charge upon entry, there will be no tax upon withdrawal during the first ten years. Lets give a new example, assuming that the new lifetime transfer into the trust was £300,000, and a capital withdrawal of £25,000 was made at the start of year five when the IHT Threshold was £275,000, the calculation would be based on 20 quarters, therefore:
Initial calculation of 20% of [£300,000 - £275,000] = £5,000
[£5,000 / £300,000] x 100% = 1.667%
[20/40] x 30% x 1.667% = 0.25%
This equates to a tax payment of 0.25% of £25,000 = £62.50
NOTE: You could infer that if there is no tax or minimal tax upon entry, it may be advantageous to make significant capital withdrawals and payments from the Trust Property, especially when the ten-year charge is looming.
What does this all mean ?
Lets assume that a lifetime transfer is made, and it attracts no lifetime IHT on entry. Subsequent capital withdrawals will not attract any liability to IHT, and if the value of the trust property (taking into account the previous withdrawals) is below the nil-rate band in force at the tenth anniversary, no IHT will be paid at that point, and there may be no further IHT upon subsequent withdrawals. Therefore, you may infer that these trust structures can still provide valid IHT planning opportunities, despite recent press comment to the contrary. The trick will be to effectively use each seven-year cycle to 'push' assets (at the value of the then current nil-rate band) out of your estate. However, if you are considering using such a method as part of your tax planning, we recommend that you seek independent Financial Advice or Tax advice. Getting this sort of planning wrong can seriously hurt your wealth.
How to use the calculator
The calculator is split into three areas. The first is to calculate the ten-year anniversary charge. The second is to calculate exit charges after the ten-year anniversary, and the third is to calculate exit charges in the first ten years. This sequence is followed, as it allows you to use figures calculated for the anniversary charge within the other calculations - however, the other options can be used independently, as long as the appropriate figures are entered.
Anniversary Charge Calculation
Next to most options is an information button that will give additional help on each specific input item in question.
To perform a calculation, you MUST enter the amount of the lifetime transfer, your unused nil-rate band allowance at the time the transfer, the IHT Threshold (or projected IHT Threshold) at the tenth anniversary, and the value of the trust property (or projected value) at the tenth anniversary.
If you are doing a calculation based on actual figures (i.e. you have reached a ten-year anniversary) then input the appropriate figures. However, you may use the calculator to work out several 'what if' scenarios. If this is your intention, you can use the additional controls to project what the IHT Threshold and the value of the Trust Property may be in ten years time. i.e. you may expect the IHT Threshold to rise at 3% per annum, and the value of the trust property to rise at 5% per annum. When projecting the IHT Threshold, ensure that the additional input box next to the drop-down box is populated. This should not be confused with the initial IHT input box that is concerned with the 'unused' IHT Threshold. For instance, if previous lifetime transfers had been made, the whole of the IHT Nil-Rate Band may already have been used up. In this case, the unused IHT Threshold should be set to '0', but the current IHT Threshold should be still be given in the projection input box, as this is the figure that will be projected forwards. Similarly, the button that projects the future value of the Trust Property takes the value of the lifetime transfer, and projects this forward by ten years. Therefore, the amount of the initial lifetime transfer MUST be input.
Calculating Exit Charges after the tenth anniversary
If you worked out the ten-year anniversary figure, you will have a percentage rate will be carried over to relevant input box, as will the ten-year anniversary date. However, you are free to override these values, or input them yourself if you are doing this as a standalone calculation. Ensure that the amount of capital withdrawals and the date when the withdrawal was made are input in order to perform the calculation.
Calculating Exit Charges in the first ten years
Similar to the points above, you can run the first calculation in order to determine whether there is an immediate liability to IHT, and the necessary rate can be extrapolated from this figure. The rate can be carried over from the ten-year anniversary calculation, or you can input it yourself. You must enter the applicable percentage rate, plus the date of the capital withdrawal in order to perform the calculation.
It should be possible to extend this toolkit further, i.e. to work out maximum level of capital withdrawals that can be taken and desirable growth rates with the aim of remaining below a future nil-rate band. If you have any suggestions about additional features, please email us. The scale and timing of such development will of course be contingent upon the level of demand.
The figures projected by the calculator are only for guidance purposes - whilst we aim to ensure the accuracy of our calculators, we can take no responsibility for the usage made of the calculations generated on this site.
Please Note: As this can be a quite complicated area of tax planning, you should not rely on this calculator alone. Lets face it, if you have enough spare capital to settle substantial amounts into IIP or Discretionary Trusts, then you probably have enough money to pay for the services of a good Accountant and/or Financial Advisor. Nuff said.