Discretionary Trust 10th Anniversary Taxation - Example
If a discretionary trust has a value during the 24-hour period of a 10th anniversary, due to a life insurance having recently paid out, or the insured person being seriously ill, there may be a tax charge. However, the tax charge is likely to be relatively small and of no real consequence.
The 10th anniversary charge is trivial - example:
Bert took a life insurance policy out on 16 March 2007, when the nil-rate band was £285,000. The policy would pay out a lump sum of £500,000 on Bert's death within 30 years. The policy was placed into a discretionary trust at outset.
Unfortunately, Bert dies on 15 March 2017, the day before the 10th anniversary, there is no time for the trustees to pay the trust money out, so the trust has a value of £500,000 on 16 March 2017.
Let's assume the nil-rate band in March 2017 is £400,000. The trust value of £500,000 therefore exceeds, by £100,000 the March 2017 nil-rate band.
There will be a 6% tax charge on the £100,000 excess. Note, it is only the EXCESS that is taxed.
This generates a total tax charge of £6,000 which represents only 1.2% of the £500,000 payout.
This 1.2% figure is known as the 'anniversary rate. It is relevant if the trustees do not pay the money out of the trust before a further 3 months have elapsed, i.e. before 16 June 2017.
If they do, there will be no further tax to pay. However, if they do not pay the money out of the trust before the 3 months have elapsed, there will be a subsequent additional exit charge to pay.
Conclusion:We regard the possibility of this 10th anniversary tax liability as having more of a 'nuisance value' than being a real threat, due to the fact that it is, in any event a relatively trivial sum and that it is only payable if your policy has a value during the 24-hour period of a 10th anniversary. To put it into context, this tax charge will only arise on a 25-year policy, for example, on just 2 days out of (inc. leap years) 9,131 days. If it had a value on one of those days, the £6,000 tax is trivial. Compare the situation as it would be if Bert had NOT placed his life cover in trust: On his death, the entire £500,000 payout will be in his estate. If his estate is above the then nil-rate band, then whenever he dies, not just on a 10th anniversary; the whole £500,000 will be taxed at the Inheritance Tax rate of 40% creating a tax bill of £200,000. |
