Discretionary Trust Taxation - Exit Charge
If your life insurance policy is in trust and has a value (due to a claim on the policy, or a 'deemed value' in the case of the insured person being in gravely ill health) on a 10th anniversary, then, in addition to the 10th anniversary charge, an exit charge may also be payable.
The exit charge is payable if, following a chargeable 10th anniversary, there is still money in the trust three months later. (If the policy proceeds are paid out by the trustees within the first three months following a chargeable 10th anniversary, there will be no further tax to pay.)
The maximum tax charged every 10 years is 6% of the value in excess of the then nil-rate band.
However, if, following a chargeable 10th anniversary, more than three months have elapsed, an exit charge may arise.
The exit charge is calculated as follows - example:
Take the number of complete quarters (3-monthly periods) that have elapsed since the 10th anniversary.
Take the value paid out by the trustees to a beneficiary or group of beneficiaries, we will assume it is the full amount of the policy proceeds in the trust, plus some growth, say a total of £550,000.
Let's assume that 2 years and 2 months have passed since the 10th anniversary, which is 8 complete quarters. Remember, in a 10-year period, there are 40 complete quarters.
The calculation would be the number of complete quarters since the last chargeable 10th anniversary, divided by 40, being the number of complete quarters in the subsequent 10-year period, then multiply the result by the 'anniversary rate' (in our earlier example, 1.2%) and finally, multiply this by the £550,000 value of the policy at the time.
We'll break the calculation down into 'bite size' chunks:
FIRST:
8 complete quarters divided by 40 quarters in the new 10-year period
8/40 = 0.2
THEN:
0.2 multiplied by the anniversary rate of 1.2%
0.2 X 1.2% = 0.0024
THEN:
£550,000 multiplied by the factor of 0.0024
£550,000 X 0.0024 = £1,320
Therefore, (in this example) the exit charge would be £1,320 in total.
Please note that any previous chargeable lifetime transfers and exit charges can affect the above calculation, but such an in-depth calculation is outside the scope of this explanation. You should seek advice from a qualified accountant if you have made any such chargeable lifetime transfers.
