March 2006 saw a major change in the tax treatment of trusts, and as we head towards the tenth anniversary of this change many trusts created since then will have reporting obligations and potential IHT liabilities to consider for the first time.

Prior to 22 March 2006 only discretionary trusts were relevant property trusts which needed to be concerned with the inheritance tax (IHT) implications of transfers into and out of the trust, and charges on each ten-year anniversary.

Following the changes, all trusts created on or after 22 March 2006 (with a few exceptions) are relevant property trusts.

It’s quite likely that up to now most of these trusts will have avoided the initial charge and exit charges:

  • A settlement into a relevant property trust only gives rise to an IHT charge if the amount settled exceeds the settlor’s available nil-rate band.  Most settlors and trustees will have taken steps to ensure that the nil-rate band was not exceeded and that no such charge arose.
  • Whilst the calculation of exit charges can be rather complicated, as a rule of thumb it is usually the case that if there is no IHT charge on the way in, there is no IHT charge on the way out for capital that is distributed out of the trust within the first ten years.

However, as the ten year anniversary approaches, even those trusts which have managed to avoid IHT charges up to now will have to consider their reporting obligations and the potential liabilities which could arise.

Many trusts will find that the value of their funds has increased faster over the ten years than the nil-rate band; to the extent that the fund values exceed the nil-rate band, currently £325,000, trusts will have an IHT liability unless some form of relief is available.

Trustees of settlements with no IHT liability will still be required to submit an account to HMRC unless they are excepted settlements with a trust fund value of no more than 80% of the nil-rate band.

Taking into account the relatively short filing and payment deadline, just six months from the anniversary date, and the complex nature of the forms and calculations required, trustees and their advisers should begin to consider the implications of the approaching anniversary sooner rather than later.

For more detail see Trusts & Estates: Ten-year charge reporting requirements.