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Money, tax and benefits
Inheritance Tax on transfers into trusts
Transfers of money or property into most trusts are subject to an immediate Inheritance Tax charge on values that exceed the Inheritance Tax 'nil rate band'. Tax is also payable ten-yearly on the value of trust assets above the nil rate band. Certain trusts are exempt from these rules.
Inheritance Tax on transfers into trusts
Transfers into most types of existing or newly created trusts above the Inheritance Tax nil rate band will be charged 20 per cent Inheritance Tax on the amount exceeding that band. The tax is payable by the person making the transfer.
Where the transfer was made after 5 April and before 1 October in any year, the tax is payable on 30 April in the following year, or where the transfer was made after 30 September and before 6 April in any year, it is payable six months after the end of the month in which the transfer was made.
What counts as 'above the Inheritance nil rate band?
The current Inheritance Tax nil rate band is £312,000 (tax year 2008-2009). In order to work out whether the Inheritance Tax nil rate band has been exceeded on a transfer you need to take into account all 'chargeable' (non-exempt, including potentially exempt) gifts and transfers made in the previous seven years. If a transfer takes you over the nil rate band, Inheritance Tax is payable at 20 per cent on the excess.
Trusts not affected by the new Inheritance Tax rules
Trusts not affected by the new rules (and so where no Inheritance Tax is immediately payable on any transfers, but with regard to transfers made during somone’s lifetime may be payable if the individual dies within seven years) are:
- lifetime transfers into a trust for a disabled person
- trusts created on death for a disabled person
- trusts created on death for a minor child of the deceased in which the child will become fully entitled to the assets at age 18
- trusts set up under a will for someone who is not a disabled person or minor child of the deceased who becomes entitled to their benefit on the death of the person who wrote the will
Options for existing trusts
Existing accumulation and maintenance trusts had until 6 April 2008 to change (where appropriate) the trust's rules to enable them to fall outside the new rules.
Interest in possession (IPP) trusts that existed before 22 March 2006, or which replace a pre-March 2006 IPP up to 5 October 2008, will continue to benefit from the old rules until they come to an end.
All other newly created IPP trusts will come under the new rules.
If you die within seven years of making a transfer
If you die within seven years of making a transfer into a trust on which you have already paid 20 per cent Inheritance Tax the tax due is recalculated using the Inheritance Tax rate applicable on death (currently 40 per cent). Tax will be payable by your estate to HM Revenue & Customs (HMRC) on the difference.
If you made a transfer on which no Inheritance Tax was due at the time, its value is added to your estate when working out any Inheritance Tax that might be due.
Ten-year Inheritance Tax charge on trusts
Trusts that count as 'relevant property trusts' must also pay:
- a 'periodic' tax charge of up to six per cent on the value of trust assets over the Inheritance Tax nil rate band once every ten years
- an 'exit' charge proportionate to the periodic charge when funds valued above the Inheritance Tax nil rate band are taken out of a trust between ten-year anniversaries
These rules don't apply to trusts which are exempt from the new rules.
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