Happy anniversary!

5 July, 2018

You might be surprised to know that there are some remarkable similarities between trusts and marriage.

Tax planning – Yes, call me unromantic but trusts and marriage can both save you tax. Trusts are very useful for tax planning and are an effective way of passing assets to the next generation. Marriage also brings a number of tax saving opportunities.

Not to be taken lightly – The decision to set up a trust involves many considerations and they should not be entered into lightly, just like a marriage.

The Big Day is only the beginning – While wedding preparations can seem laborious, the real hard work for couples begins once the Big Day is over and they embark on the joys and challenges of married life.  Similarly, while trustees may breathe a sigh of relief once the initial formalities have been dealt with, they cannot just sit back and relax once a trust has been set up.

This is not the place to give you my recipe for a happy married life but trustees do need to know about their continuing obligations.

Trustees’ duties – As well as their duties to look after the trust assets and the needs of the beneficiaries, trustees must keep accounts, record their decisions and comply with HMRC reporting requirements.  A key event, easily overlooked by trustees, is the 10 year anniversary charge.

10 year anniversary charges only apply to ‘relevant property trusts’. Broadly, this includes most discretionary trusts, and life interest trusts not set up by Will, but there are exceptions and trustees should seek advice to check whether the rules apply to their trust.  

Nil rate band discretionary trusts are a common type of relevant property trust. As they often do not require active management, the trustees must keep a note of each 10 year anniversary to avoid it passing by unnoticed.

What is the significance of the 10 year anniversary? Tax may be payable and the deadline is tight – As the name suggests, the 10 year anniversary arises every 10 years after the creation of the trust.  This is the date of the trust deed for trusts made during lifetime, or the date of death for trusts created by a Will.  The trustees must review the value of the trust assets and obtain valuations if necessary.  An anniversary charge arises if the trust assets are worth more than the nil rate band (currently £325,000).  The charge is currently a maximum of 6% on the value of the assets over the nil rate band and the trustees must submit an Inheritance Tax (IHT) return to HMRC along with payment of the tax.   If the assets are worth 80% or more of the nil rate band (£260,000), the trustees must still submit an IHT return to HMRC even though there is no tax to pay. 

The deadline for paying tax and submitting the return is 6 months from the end of the month in which the 10 year anniversary arises. Unlike a spouse, HMRC will not accept a tin gift as payment; the similarity, perhaps, is that penalties and interest arise if the deadline is missed!

It may be possible to take action to avoid a charge arising.  Trustees should take legal advice well before the 10 year anniversary to allow time to consider their options and take any necessary action.

Anniversaries are significant events in both a trust and a marriage and must be addressed to avoid displeasing HMRC or your spouse.  I will leave you to decide which is worse!

If you would like to discuss trusts and 10 year anniversary charges further please contact Francesca Sassoli on +44 (0)1892 506 354 or at francesca.sassoli@crippspg.co.uk.