Inheritance tax Taxation of trusts (United Kingdom)

the inheritance tax ( iht ) treatment of trusts substantially revised finance act 2006, effect 22 march 2006. possible types of trust can exist inheritance tax purposes set out in table below:

notes:

relevant property trusts taxed:

on creation:

if trust created inter vivos (i.e. during settlor s lifetime):

it taxed @ half of current death rate iht. death rate 40%, , 2012/13 iht nil-band £325,000. therefore, if settlor has made no gifts , settled no trusts in 7 years prior settling trust in 2012/13, taxed @ nil rate (0%) on first £325,000 , 20% on balance.
if settlor dies within 7 years of settlement, initial 20% charge recalculated if pet, , if more tax paid, balance due (but there no repayment if recalculation produces lower result).


if trust created on death (i.e. testamentary trust) suffer iht @ creation under normal rules, because of death. there therefore no need trust taxed separately on creation.


to ten-year charges , on each tenth anniversary of settlement (or of date of death, in case of testamentary trust). rate 6% on value of trust s assets exceeding nil-band @ time.
to exit charges when money leaves trust: appointment beneficiary. simplifying little, rate of iht proportion of next ten-year charge have been, time has elapsed since creation or last ten year charge bears ten years.

the interest-in-possession treatment, since 2006, applies trusts interest-in-possession (as defined above). applies, such trusts taxed attributing trust s value beneficiary entitled income. accordingly:

on creation:

in rare cases can created in lifetime taxed pets.
they taxed part of death estate, when created will. spouse exemption available interest-in-possession beneficiary spouse or civil partner of deceased.


on termination (i.e. termination of interest-in-possession, may, or may not, termination of trust):

the value of trust s assets taxed @ death rates upon death of interest-in-possession beneficiary. aggregates beneficiary s estate, , trust , estate share nil-band between them, in proportion values.
the value of trust s assets taxed if pet beneficiary s right receive income ceases in or lifetime.




source: schedule 20 finance act 2006.