Trusts’ Inheritance Tax charge at ten-year anniversary
For the attention of trustees of and advisers to WAY Inheritor Plans
WAY Inheritor Plan trusts settled on or after 22nd March 2006 fall within the “relevant property” regime
under the terms of the Inheritance Tax Act 1984 (“the Act”). The Act provides that a charge to
Inheritance Tax (IHT) is assessed on creation of the trust and subsequently upon each tenth anniversary
thereafter. This document is intended to assist trustees and their advisers of WAY Inheritor Plans in
preparing for the first ten-year anniversaries that will occur from March 2016 onwards.
Although at the time of writing the first ten-yearly anniversaries are more than a year away, it may be
possible to incorporate the reversion of any flexible Relevant Share scheduled for the 9th anniversary
into the settlor and trustees’ financial planning which may (in a very limited number of cases) help to
structure the exposure to tax in the most efficient manner. As a consequence we are publishing this
note in 2015 to allow trustees and advisers to consider every opportunity when planning for the event.
Trust ten-year anniversary charge
The value of Relevant Property held in a settlement sits outside of the estates of its beneficiaries
denying HMRC the opportunity to levy IHT upon the death of those beneficiaries. The Act therefore
provides for IHT to be charged on the value of the trust fund itself every 10 years (the “Periodic” charge)
and on the value of capital appointments between each 10 year anniversary (the “Exit” charge). Each
trust will benefit from the IHT nil rate band (NRB) applying as at the date of the 10 year anniversary.
The first two components of the value assessed will be the same in all circumstances:
1. The value of the relevant property in the trust on the day before the 10-year anniversary. Details
of how to calculate this value for each variant of WAY Inheritor Plans are given below.
2. The total historic value of any chargeable transfers subject to Inheritance Tax (including any
failed PETs) that the settlor made in the seven years before the trust was set up. This is the
standard 7 year cumulation or “back shadow” that needs to be factored in when any IHT transfer
is taxed.
In addition to these standard components it may also be necessary to take into account some or all of
the following depending on the circumstances pertaining to the settlor and trust:
 The amount of any transfers of relevant property out of the trust within the last 10 years. This
captures the value of any capital distributions made to the beneficiaries, but will not include the
value of any reversions made to the settlor
 The initial value of any property in any other settlement (except wholly charitable trusts and bare
trusts) that the settlor set up on the same date as this trust. These are known as “Related
Settlements”
 Whether any of the relevant property was not relevant property for the whole of the last 10 years
 The initial value of any trust property that has never been relevant property
WAY Investment Services Limited, Cedar House, 3 Cedar Park, Cobham Road, Wimborne, Dorset, BH21 7SB Tel: 01202 890 895 Fax: 01202 890 894
Registered No. 3181187 An Appointed Representative of WAY Fund Managers Ltd. which is authorised and regulated by the Financial Conduct Authority
A Member of the WAY Group of Companies
www.wayinvestments.com
A Periodic charge will arise where the total value assessed at the anniversary exceeds the current NRB.
After a rather convoluted calculation a Settlement Rate for the Periodic charge is derived. This will be a
maximum rate of 6% (although typically a much lower rate will apply as can be seen in the example
below). The Settlement Rate is then applied to the value of the relevant property to determine the
Periodic charge due. The Settlement Rate determined at each 10 year anniversary will also be the Exit
charge rate for the following 10 years.
It can be seen that the rules determining the value assessed are rather complicated, and recent
attempts by the government to “simplify” the calculation have – thankfully in the circumstances –
largely been abandoned. The rules are changing slightly from April 2015 although in most cases the
changes will not affect the circumstances of WAY Inheritor Plans.
WAY Investment Services Limited as Plan provider will not have knowledge of all of the components of
the calculation for each individual trust. Furthermore we are not authorised to give tax, legal or
financial advice. As a consequence: WAY strongly recommend that professional assistance is sought
when calculating the periodic charge and meeting HMRC reporting requirements.
Value of the relevant property on the day before the 10-year anniversary
The relevant property in a WAY Inheritor Plan trust represents the value of the beneficiaries’ interest in
the trust. All variants of the Plans except for the (Gift and) Loan version also incorporate a reversionary
interest in favour of the settlor whilst alive – the Relevant Shares. The reversionary interest does not
form part of the relevant property, rather it is held under bare trust for the settlor.
Where the Relevant Shares are flexible – i.e. the trustees have the power to defer them to later
anniversaries – the settlor’s interest will have no value at any time since he/she has no control over
whether or when a reversion would actually occur. The total value of the assets held in flexible Relevant
Shares is therefore relevant property and will be included in the Periodic charge calculation.
Where the Relevant Shares are fixed and may not be deferred the value of the assets will be discounted
according to actuarial principles. The discount represents the value of the settlor’s interest held under
bare trust and is not subject to the Periodic charge. The net value of the assets after the discount is the
relevant property and will be included in the IHT calculation. For a discount to be accepted on the initial
transfer the client must first have been underwritten and the discount calculated according to HMRC
prescribed methodology. HMRC have advised that – providing the settlor is alive on the 10th anniversary
- a discount may be calculated following the same method, simply advancing the settlor’s age (after
underwriting adjustments) by 10 years. No further underwriting is therefore required ahead of the 10 th
anniversary. (WAY will perform this calculation for each WAY Inheritor Plan trust as at the anniversary.)
For example if a Plan was settled by a 60 year old in May 2006 with an underwriting adjustment to age
62, the calculation should be repeated in 2016 (when the settlor will be 70) using an age input of 72.
The table overleaf shows how the relevant property value may be calculated for each variant of the
trust. The market values of the assets will be determined by closing unit balances and the published
fund prices applying on the day before the anniversary.
Page 2 of 7
Plan variant
Flexible
Gifts from Income
Discounted
Duo
(Gift and) Loan
Relevant property value
Market value of the assets held in all Relevant Shares (value of the
whole trust fund)
Market value of the assets held in all Relevant Shares (value of the
whole trust fund)
Market value of the assets held in all Relevant Shares (value of the
whole trust fund) discounted according to HMRC rules
Market value of the assets held in all flexible Relevant Shares
Plus
market value of the assets held in all fixed Monthly Relevant Shares
discounted according to HMRC rules
Market value of the assets held less value of the outstanding loan from
the settlor
A worked example
Mrs Jones settles a WAY Flexible Inheritor Plan on 15 th May 2006, investing the (then) NRB amount of
£285,000 into the WAY Global Blue fund then transferring the units to her WAY Inheritor Plan trustees.
She had not made any previous transfers in the 7 years prior to settlement, so the cumulation value is
nil making the full NRB available to the transfer resulting in a nil IHT Entry charge and consequently nil
Exit charges in the first 10 years. This is the only trust settlement that Mrs Jones has created.
Mrs Jones set a reversion schedule of 10% Relevant Shares for each of the first 10 anniversaries. No
reversions have been made so far, her trustees having decided to defer each Relevant Share by 10 years
shortly before it became due. No appointments of capital or fund switches have taken place since
inception. The trustees therefore hold the same number of units in WAY Global Blue as at the outset.
WAY Global Blue Portfolio has performed strongly since 2006 and in early 2015 the trust is worth
£375,000. This value sits outside Mrs Jones’s estate. The original transfer of £285,000 remained in her
estate for 7 years after settlement but escaped the cumulation on the 7th anniversary, 16th May 2013.
The 10th anniversary will fall due on the 15th May 2016 and as we have seen the calculation of the
relevant property value for the Periodic charge must be made on 14 th May 2016. If we run the Periodic
charge calculation – albeit one year early – based upon a trust fund value of £375,000 we get:
Trust Fund Value
Plus: 7 year cumulation
Assumed Chargeable Transfer:
Less: Nil Rate Band
Excess over NRB
Aggregate IHT at lifetime rate 20% (A)
Excess of cumulation over NRB
Notional IHT at lifetime rate 20% (B)
Effective Rate: (A - B) / Assumed Chargeable Transfer
Settlement Rate: Effective Rate x 30%
Periodic Charge: Trust Fund Value x Settlement Rate
Page 3 of 7
£375,000
£0
£375,000
£325,000
£50,000
£10,000
£0
£0
2.67%
0.80%
£3,000
It can be seen that the Periodic charge is likely to be rather more inconvenient than expensive. By
comparison, if the assets of the trust fund sat in Mrs Jones’s estate and were over the NRB, then on
death they would suffer an IHT charge of £150,000 (£375,000 x 40%).
Paying the tax
Any ten year anniversary charge must be paid 6 months after the date of the anniversary. The liability
falls upon the trustees who would normally sell units or pay out cash from the trust fund holdings to
settle the tax bill with HMRC.
Please remember that the firm operating the trustee investment account – e.g. WAY Fund Managers
Limited, a wrap platform or a discretionary fund manager – will normally only make payments to a bank
account in the same (joint) names as the trustee account or to a designated client money account. They
will not be able to make a third part payment – e.g. direct to HMRC. Where the services of an
accountant have been engaged to calculate and submit the tax return (as is strongly recommended) that
firm may offer to facilitate settlement of the tax bill via its client money account.
The settlor could pay the tax charge on behalf of the trustees, if he or she preferred. This does not
offend any trust of tax rules; however the payment will constitute a further transfer of value by the
settlor to the trustees (as the liability falls on the trustees in the first instance). Since the transfer is to a
Relevant Property trust it will be immediately chargeable to IHT subject to available exemptions. The
settlor has an annual exemption for IHT of £3,000 and may carry this forward for one year if unused. So
if Mrs Jones had not made any transfers or gifts in the tax year when the Periodic charge payment is
due, or in the previous tax year, she would be able to pay up to £6,000 on behalf of the trustees without
incurring a chargeable transfer. There is therefore a good chance that the £3,000 due for this trust
could be paid as an exempt transfer by Mrs Jones on behalf of the trustees. Once again clients are
strongly recommended to seek professional advice before taking action.
Capital distributions ahead of the ten-year anniversary
It is tempting to think that the charge may be mitigated by passing capital out of the trust ahead of the
anniversary. However, capital distributions to beneficiaries are a type of chargeable transfer for IHT
purposes and will be subject to the prevailing Exit charge. In the first 10 years of the WAY Inheritor
Plan’s existence the Exit charge will normally be nil by design – although it is possible for Exit Charges to
be triggered by the death of the settlor and failure of any PETs that pre-date the setup of the trust. In
most cases in the first ten years, no Exit charge will result from the appointment of capital.
However, the value of any capital appointments will be added back into the Periodic charge calculation
and as a result will not reduce the amount of this charge by as much as might be expected. Continuing
with our example case, it might be anticipated that by appointing £50,000 to one or more beneficiaries
before the ten-year anniversary the Periodic charge would be avoided as the trust fund value would not
exceed the NRB. We can see in the recalculation below that in fact the Effective Rate is unchanged and
the Periodic charge is therefore only reduced in relation to the value of the appointment.
Page 4 of 7
Trust Fund Value
Plus: 7 year cumulation
Plus: Appointments in previous 10 years
Assumed Chargeable Transfer:
Less: Nil Rate Band
Excess over NRB
Aggregate IHT at lifetime rate 20% (A)
Excess of cumulation over NRB
Notional IHT at lifetime rate 20% (B)
Effective Rate: (A - B) / Assumed Chargeable Transfer
Settlement Rate: Effective Rate x 30%
£375,000
£0
£0
£375,000
£325,000
£50,000
£10,000
£0
£0
2.67%
0.80%
£325,000
£0
£50,000
£375,000
£325,000
£50,000
£10,000
£0
£0
2.67%
0.80%
Periodic Charge: Trust Fund Value x Settlement Rate
£3,000
£2,600
It can be seen that whilst some reduction in any forthcoming Periodic charge may result the benefit is
likely to be small in relation to the amount appointed, and it is very unlikely that a saving in the Periodic
charge on its own would be reason enough to make the appointment. The trustees should of course
primarily be concerned as to whether the beneficiaries have need of the appointment and whether it is
appropriate to release the capital bearing in mind that the appointment will defeat the other
beneficiaries’ interests in that capital and the settlor’s reversionary interest.
Reversions and the relevant property value
We have noted above that the whole or discounted value of future dated Relevant Shares – i.e. where
the assets remain within the trust – are comprised in the relevant property. When capital reverts to the
settlor the value of that Relevant Share ceases to be relevant property on the associated Relevant Date
and the beneficial interest becomes the settlor’s absolutely. The reversion does not constitute a
transfer for IHT purposes (an “Exit” event) and so is not added back into value assessed for the Periodic
charge calculation.
This provides a limited opportunity to utilise a flexible reversion (that otherwise would be deferred)
prior to the 10th anniversary to reduce the relevant property value on the anniversary and thus reduce
or possibly eliminate any Periodic charge. Since the relevant property value is calculated on the day
before the anniversary the 10th anniversary Relevant Share cannot be used for this purpose by trustees
of the Flexible or Duo Plans since that reversion falls in the second 10 year period rather than the first.
Thus the last opportunity to utilise a reversion in this way is on the 9 th anniversary for these plans.
Please note that the Relevant Dates for the Gifts From Income Plan are defined to fall 3 days prior to the
anniversaries of the Plan, and so for this Plan only the 10 th Relevant Share may be reverted prior to the
calculation date of the Periodic charge.
Page 5 of 7
9th Anniversary Reversion
The last opportunity to utilise a reversion to influence the Periodic charge is the 9 th anniversary – 16th
May 2015. The 10% Relevant Share scheduled is worth £37,500. If we compare the original Periodic
charge calculation with one based upon a trust fund value of £337,500 (90%) we can estimate the saving
that might be secured by making a reversion at year 9, and consider whether this is worthwhile:
Trust Fund Value
Plus: 7 year cumulation
Assumed Chargeable Transfer:
Less: Nil Rate Band
Excess over NRB
Aggregate IHT at lifetime rate 20% (A)
Excess of cumulation over NRB
Notional IHT at lifetime rate 20% (B)
Effective Rate: (A - B) / Assumed Chargeable Transfer
Settlement Rate: Effective Rate x 30%
Periodic Charge: Trust Fund Value x Settlement Rate
£375,000
£0
£375,000
£325,000
£50,000
£10,000
£0
£0
2.67%
0.80%
£337,500
£0
£337,500
£325,000
£12,500
£2,500
£0
£0
0.74%
0.22%
£3,000
£750
A potential IHT saving could therefore be achieved by making a reversion on the 9th anniversary
reducing the subsequent Periodic charge by approximately £2,250. Whist this is a tempting tax saving
there are a number of other important points to take into account:
 Capital Gains Tax (CGT). The reversion of 10% of the units is a deemed disposal for CGT
purposes. The £37,500 worth of units cost £28,500 (£285,000 x 10%) in 2006, and so the
disposal realises a gain of £9,000. In 2015/16 the trustees will have a CGT Annual Exempt
Amount (AEA) of £5,550. The trustees will therefore have to pay CGT of £966 based on the
trustee rate of 28%. The net saving of IHT and CGT is therefore £1,284 (£2,250 - £966)
 The other critical consideration is what will the settlor do with the money capital once it has
been reverted? Mrs Jones will receive a net amount of £36,534 (£37,500 - £966) after CGT. If
she uses those funds to meet her expenditure then the tax savings can be secured. However if
her estate was still in excess of the NRB, she holds onto the capital and subsequently dies the
reverted capital would suffer 40% IHT on death, thus £14,613.60.
It can be seen that if the reverted capital is held in the settlor’s estate and becomes subject to IHT on
death in the near future the tax due on the estate will extinguish the savings on the Periodic charge
many times over. A result like that would be particularly unfortunate given that Mrs Jones made the
effort back in 2006 to create the trust and over time remove the capital from her estate.
Page 6 of 7
We can see how limited the planning opportunity is. However advisers and trustees should be aware of
it since there could well be a few cases for which it is a suitable strategy. This would be the case where
all of the following circumstances are met:



It is anticipated that the trust will suffer a Periodic charge to IHT
There is an opportunity for the settlor to spend a reverted amount rather re-accumulate it within
his/her estate
Any source of funds that would otherwise cover the spending – and thus would not be depleted
in that year – is also outside of the estate – e.g. a personal pension fund
In summary
The Periodic charge is largely an administrative rather than financial headache, for it will typically be
small when compared to the overall tax savings secured via the WAY Inheritor Plans. Whilst partial
savings are on offer as a secondary benefit of appointment and reversion of capital, such actions must
be justified by a primary need to deploy the capital away from the trust for the benefit of the
beneficiaries or settlor. Trustees and their advisers should be aware that the 10 year anniversaries are
approaching and consider this when reviewing the trust and its investment holdings from the 9th
anniversary onwards. WAY will be pleased to provide as much help and information we can to assist in
the decision making process.
Please Note: The content of this document does not constitute advice or a recommendation to any
individual and is not intended to address all of the necessary areas that should be reviewed. WAY
Investment Services Limited is not authorised to give financial, legal or tax advice – you should always
seek suitable advice from a qualified professional, authorised and regulated professional. WAY strongly
recommends that professional assistance is sought when submitting the ten-year anniversary tax return
and before effecting any transactions in anticipation of the assessment to tax. Tax and trust legislation
may change from time to time and the tax treatment of the investment/trust may depend on the
investor’s/settlor's individual circumstances. The information contained within this document is based
on WAY's understanding of current law and HMRC practice as at March 2015.
Page 7 of 7