An entry charge
If you make a gift during your lifetime into a discretionary trust, and the amount of that gift exceeds the ‘nil rate band’ (currently £325,000), then you will have to pay lifetime IHT at 20% on the amount above the nil rate band threshold. For example, a £330,000 gift would mean that £5,000 would be taxed at 20%. Also, if you’ve made any other gifts or transfers in the preceding seven years, these will be taken into account and will reduce the available nil rate band.
If you make a transfer into a discretionary trust and die within seven years, any lifetime IHT charge will be recalculated at the death rate, with credit for any tax you have already paid. There is also a partial tax relief, called ‘taper relief’, which reduces the amount of the transfer which is taxable. This begins from three years after the transfer was made and the
relief increases the more years that pass.
If you create a discretionary trust in your Will, the value of the assets going into the trust will be included in your IHT assessment on your estate. IHT is taxed at a higher rate of 40% upon death, however, there may be additional exemptions and reliefs which can be used to reduce the amount that your estate has to pay.
Aside from these entry charges, assets contained within a relevant property regime trust at the time of your death will not be considered a part of your estate. As such they will not affect the IHT calculated on your estate upon death, except in the ways described above.
A ten-year anniversary (periodic) charge
This is a charge on the value of the trust fund every ten years from the date of the trust’s creation. The maximum tax rate for these charges is 6% and is payable by the trustees (from the trust).
The ten-year periods are counted from the creation of the trust, even if it was not a relevant property trust at that time, but the charge is reduced if assets are not relevant property for the full ten years period.