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Trust tax charges – don’t miss the 10 year anniversary charges

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Trusts are required to pay tax annually on their income and gains as well as filing a tax return. In addition, many are also subject to a “Principal Charge” commonly known as “the 10 yearly charge” which usually occurs on the 10 year anniversary of the set up of the trust and again every 10 years.  (It can also occur on different dates depending on the circumstances of the trust).

An additional tax return may need to be submitted to report details of the trust assets to HMRC on its 10 year anniversary and this is also when inheritance tax (IHT) at a rate of up to 6% is paid to HMRC on the “chargeable value” of the trust at that date.

This important event is often missed by Trustees which can cause issues when planning around trust distributions and asset investments, not to mention the penalties charged by HMRC for late filing of the return and interest on late paid tax.

Often when trusts are set up, they will own assets that attract 100% relief from IHT, such as shares in a trading company that qualify for Business Property Relief (BPR) and no charges to IHT should arise at the 10 year anniversary date. However, over time the shares may be sold or the underlying business may diversify or invest surplus cash in assets that do not qualify for BPR such as stocks or properties so that BPR may not be due or be restricted.

Trustees can also be caught out if they have made investments such as bonds within a trust “wrapper” as part of an IHT planning exercise. It is often within the small print that it is highlighted that the trust is indeed subject to potential IHT charges such as the 10 year charge.

It is therefore recommended to carry out reviews around year 7 of the 10 year period, even if the Trustees do not believe a charge to be due just in case any planning needs to be done.

Please do pick up the phone to your BHP contact and we can help you look at the trust assets to establish whether there any lurking charges – and plan to avoid them where possible.