Legal News | 20.04.23

Inheritance tax and discretionary trusts

Last week we looked at inheritance tax (“IHT”) as it applies to individuals.  This week, Andrew Langbridge, a solicitor in Wansbroughs’ Private Client Team, looks at IHT as it applies to discretionary trusts.

Unlike a gift to an individual, which is only chargeable to IHT if the person making the gift (the “donor”) does not survive it by seven years, a gift to a discretionary trust is immediately chargeable to IHT.

To the extent that a gift to a discretionary trust exceeds the donor’s available nil rate band (frozen at £325,000 until 5 April 2028), IHT will be charged at the lifetime rate of 20%.  If the donor does not survive the gift by seven years, IHT will be recalculated at the death rate of 40% with credit given for any IHT already paid.

In addition to this entry charge on a gift to a discretionary trust, a discretionary trust is also subject to charges on every tenth anniversary of its creation and whenever assets leave it.  The calculation of these ten-year anniversary and exit charges is complex but, broadly, they can amount to up to 6% of the value of the discretionary trust on the relevant date.

Wansbroughs can assist with the calculation and reporting of entry, ten-year anniversary and exit charges on discretionary trusts.  If you would like further information, please contact your usual Wansbroughs’ contact or e-mail the Private Client Team at wealth@wansbroughs.com.