IHTM42001 - Relevant property trusts: introduction

Overview

This chapter of the Inheritance Tax Manual deals with Inheritance Tax charges on ‘relevant property’ (IHTM42161) and property held in various special trusts (IHTM42801).

References to ‘settlement’ and ‘trust’ throughout this chapter are interchangeable terms given the same meaning.

Charging provisions

Charging provisions are explained in more detail at chapter 4 of this manual from IHTM04095.

Settlor

Subject to reliefs and exemptions, when a relevant property trust or a special trust is set up and assets transferred into it, the settlor makes an immediately chargeable transfer, chargeable at half the death rates (IHTM04067). However, transfers into disabled person’s trusts are Potentially Exempt Transfers (PETS).

If the settlor dies within 7 years, there may be an additional tax recalculation. (IHTM14571)

Relevant Property Trusts

At each ten year anniversary (TYA) from the date the trust was set-up, there is a ‘principal’ charge of up to 6% of the value of the relevant property (assets after reliefs) in the trust. If funds were settled later than the date of set-up (or last TYA) then an allowance is made to tax those assets in proportion to how long they have been in the trust. This is done by expressing the ten year period as forty quarters and calculating the number of whole quarters the property was relevant property. This fraction is then used to calculate the chargeable rate.  

Appointments out of the trust capital are liable to a separate ‘proportionate’ charge of a fraction of 6%. There are different rules for charges before and after the first TYA. Again, the number of fortieths the assets have been in the trust since the last TYA or the set-up of the trust are used to calculate the rate to charge the assets leaving the trust. 

Special trusts

Special trusts are defined by the legislation. The trust assets are not relevant property and so are not liable for TYA or proportionate charges. When a special trust no longer satisfies the statutory conditions there is a charge – a flat rate charge - (IHTM42801). The rate of the charge depends upon how long the trust assets have been exempt from the relevant property charges. By flat rate we mean that there is no nil rate band available. 

IHTA84/S71F sets out how any proportionate charge on an 18-25 trust is calculated.

EBTs

Employee Benefit Trusts (EBTs) are a type of special trust.  Detailed guidance is given as a separate sub-chapter of this manual.(IHTM42900)