How Business Property Relief can help mitigate periodic charges in trust investments

Just over a decade since periodic and exit charges on relevant property were extended beyond discretionary trusts, the first of those trusts set up post 22 March 2006 have just reached or are approaching their first tenth anniversary and, with it, the ten-yearly periodic charge that comes with it.

With the majority of asset types, such as money, shares, houses or land, counting as relevant property, a large proportion of trusts are liable to IHT. When the changes were first introduced, the immediate option was for investors to simply limit the value of transfers to within the nil rate band threshold. However, due to rising asset values and the nil rate band being frozen since April 2009, an increasing number of trusts are now holding assets in excess of the nil rate band and are therefore looking at an IHT exit charge when they come to transfer relevant property out of the trust.

With each individual asset in a trust being treated as its own separate identity, different assets are subject to different inheritance tax rules, making it a complicated charge to work out. However, even though different assets may receive different tax treatment, it is always the total net value of all the assets in a trust (minus any debts or reliefs such as Business or Agricultural Relief), that is used to work out whether a trust exceeds the threshold and whether Inheritance Tax is due.

As many investors approach their first periodic charges, advisers have been looking for ways to reduce the value of the fund below the threshold and thus, save their client’s money. Aside from full distribution of the trust before the tenth anniversary, another option is to invest a proportion of the trust into assets that quality for Business Property Relief (BPR).

As we’ve mentioned in previous blog posts, BPR can offer between 50% and 100% tax relief, depending on the asset held. In this case, the assets must have been held for at least 2 years prior to the ten year anniversary in order to qualify for relief, after which point they can be transferred into trust. As an added advantage, BPR can also be used as a mechanism through which to mitigate initial entry charges when making larger transfers into a relevant property trust and also add diversification to trust funds by accessing asset classes that may not already be represented.

Where BPR is available at 100%, it is theoretically possible to transfer an unlimited amount into a relevant property trust without incurring the 20% initial charge. Once in trust, BPR assets can be replaced however consideration must be given to the outcome should the settlor die within seven years of the transfer, when inheritance tax of 40% will be payable versus the reduced amount of 20% which is payable when the payment is made during your lifetime.

If you think your relevant property assets currently held in trust may be subject to periodic or exit charges, please contact your Finura Partners adviser.

Sources:

http://oxcp.us11.list-manage.com/track/click?u=1bedd14552cb93590b4980caa&id=251f3d81a9&e=f16eb99726 and https://www.gov.uk/guidance/trusts-and-inheritance-tax#the-10-year-anniversary-charge

The Financial Conduct Authority does not regulate tax and trust advice.