Inheritance tax: transfers to and from trusts and property within trusts: formula sheet

Key formulas

Bare trust

Gift into bare trust = PET

Beneficiary is treated as owner. Exempt if the donor survives 7 years.

Relevant property trust

Lifetime transfer into discretionary trust or most post-2006 IIP trusts = CLT

Chargeable at once, even if the donor survives.

Lifetime IHT on a CLT

Tax = 20% × (CLT after exemptions − available nil rate band)

Nil rate band is £325,000, reduced by CLTs in the previous 7 years.

Gross up when donor pays tax

Gross chargeable transfer = available nil rate band + (net chargeable amount above the available nil rate band × 100 ÷ 80)

Use this where the donor pays the lifetime tax. First deduct the donor's annual exemptions from the gift. The available nil rate band is £325,000 less CLTs in the previous 7 years. Gross up only the net amount above that available band. If the band is already used up, gross up the whole net chargeable amount.

Death rate and taper relief

Death rate 40%. Taper relief: 3-4 yrs 20%, 4-5 yrs 40%, 5-6 yrs 60%, 6-7 yrs 80%

Taper reduces the tax, not the value. It applies only if tax is due after using the nil rate band. There is no taper relief where death occurs within 3 years of the transfer.

Residence nil rate band

RNRB £175,000

Not available against lifetime gifts to a trust. It applies to the death estate.

Value of a transfer

Loss to donor's estate = value before − value after

Use this, not just the asset's value, if the donor pays the tax or related property applies.

Chargeable amount

Transfer of value − annual exemptions (current and prior year if unused) − reliefs

Relief such as business property relief comes off first, then annual exemptions. The annual exemption is £3,000. It is not given in the tax tables, so you must learn it. Any unused amount carries forward one year only, and the current year's exemption is used first.

Nil rate band and rates

NRB £325,000; lifetime rate 20%; death rate 40%

The residence nil rate band (£175,000) does not apply to lifetime transfers. It is only relevant to a death estate.

Lifetime tax, trustees pay

Tax = 20% × (net chargeable transfer − NRB available)

NRB available = £325,000 − CLTs in the previous seven years.

Lifetime tax, donor pays (gross up)

Gross transfer = NRB available + (excess net ÷ 80%) ; tax = 20% × (gross transfer − NRB available)

Tax on the excess = net excess × 20/80. The gross transfer is used for later cumulative totals.

Taper relief

3–4 yrs 20%; 4–5 yrs 40%; 5–6 yrs 60%; 6–7 yrs 80% reduction in the tax

There is no relief for death within three years. It is a reduction in the tax charged at 40%, so the effective rates are 32%, 24%, 16% and 8%.

Additional tax on death

(40% tax on the CLT − taper relief) − lifetime tax paid, minimum nil

Compute the death tax using the NRB left after earlier gifts in the seven years before the CLT.

Effective rate

Effective rate = (IHT on hypothetical transfer ÷ hypothetical transfer) × 100

Tax the hypothetical transfer at the 20% lifetime rate above the available nil rate band of £325,000, less the settlor's chargeable transfers in the 7 years before creation.

Periodic charge rate

Periodic rate = 30% × effective rate

Apply it to the value of relevant property immediately before the anniversary, after deducting reliefs such as BPR or APR.

Periodic charge

Periodic charge = value of relevant property × periodic rate

Payable by the trustees from the trust fund. Charged every ten years from creation.

Exit charge before the first ten-year anniversary

Exit charge = amount leaving × (30% × effective rate at creation) × complete quarters ÷ 40

Count only complete quarters since creation. The hypothetical transfer is the value of the property put into the trust at creation (assuming no related settlements). Use the nil rate band at the date of the exit, less the settlor's chargeable transfers in the 7 years before creation.

Exit charge after a ten-year anniversary

Exit charge = amount leaving × (rate charged at last periodic charge) × complete quarters since last ten-year anniversary ÷ 40

The rate is the actual periodic rate, not the effective rate.

Grossing up

Gross amount = net amount ÷ (1 − exit rate)

Needed when the trustees bear the tax, because the amount leaving is then the net amount. If the beneficiary bears the tax, the amount leaving is already the gross figure, so do not gross up.

Lifetime rate and nil rate band

Lifetime rate 20%; nil rate band £325,000

Given in the ATX-UK tax tables. The 40% death rate is not used in the effective rate working.

Deemed ownership

Life tenant with qualifying IIP = deemed owner of the trust fund

No periodic or exit charges on the trust. The fund is part of the life tenant's estate for IHT.

Tax on fund at life tenant's death

IHT on the whole estate (free estate + fund) at 40% above the available nil rate band of £325,000 (less earlier transfers in the previous 7 years)

The tax on the whole estate is then apportioned between the free estate and the fund by value. Residence nil rate band of £175,000 may apply if its conditions are met. Check the tables.

Trustees' share of tax

Tax on fund = total estate tax × fund ÷ total estate

The trustees pay the share of tax relating to the trust assets. The personal representatives pay the rest.

Lifetime termination

Absolute entitlement to an individual, or to a disabled person's trust, or to a qualifying bereaved minor trust (IPDI ending in lifetime) = PET. Into a relevant property trust = CLT. To spouse = exempt.

A PET becomes chargeable if the life tenant dies within 7 years. Taper relief is in the tax tables: 20% reduction after 3 years, 40% after 4, 60% after 5, 80% after 6.

Bereaved minor trust

Parent's death, child under 18, absolute entitlement at 18 = no periodic charge, no exit charge

It normally arises on a parent's death. An IPDI ending in the life tenant's lifetime in favour of a qualifying bereaved minor trust is a PET. If entitlement is set for an age after 18, it is not a bereaved minor trust.

18 to 25 trust

Parent's death, child entitled at an age between 18 and 25 = no periodic charge, exit charge only on capital leaving after the 18th birthday

The exit charge is based on the complete quarters since the child's 18th birthday. This is a separate regime from the bereaved minor trust.

Nil rate band and rates

Nil rate band £325,000; lifetime rate 20%; death rate 40%

Lifetime rate applies to CLTs above the available nil rate band. Death rate applies to the death estate and to additional tax on lifetime transfers within 7 years of death.

Residence nil rate band

RNRB = £175,000 (death only)

Not available for lifetime transfers or relevant property trust charges. A home must be closely inherited by direct descendants. It is tapered away for large estates.

Value after relief

Taxable value = value of asset − (BPR or APR % × qualifying value)

For APR, use the agricultural value only. Deduct relief before using the nil rate band.

Taper relief on additional tax

Tax reduced by: 3-4 yrs 20%; 4-5 yrs 40%; 5-6 yrs 60%; 6-7 yrs 80%

Taper reduces the tax, not the value. It applies only where the cumulative chargeable transfers in the 7 years before the gift, including the gift itself, exceed the nil rate band. It reduces the tax on that excess.

Clawback condition for lifetime transfers

Relief on a gift survives death within 7 years only if the donee still owns the asset and it still qualifies at death

If trustees sold or the asset ceased to qualify, the relief is lost and additional tax is recalculated.

Ownership period

Minimum 2 years of ownership (including trustees' period)

Replacement property rules can combine ownership periods. Check the facts in the question.

Gift into trust: deemed proceeds

Deemed proceeds = market value at date of transfer

Applies to any gift into a trust, even with no payment. The donor is chargeable on the gain.

Holdover relief effect

Trustees' base cost = market value − gain held over

Donor's chargeable gain becomes nil if the relief is claimed in full, so their annual exempt amount is not used on that gain.

Trustee CGT

(Gains − trustee annual exempt amount) × 24%

The tax tables give only the individual £3,000. Know that the trustee amount is half, £1,500, unless the question states a figure. It is shared between trusts by the same settlor, with a minimum of one-fifth of £3,000 (£600) per trust.

Discretionary trust income tax rates

Non-dividend income 45%; dividends 39.35%

These are the additional rates in the tax tables. A standard rate band may apply to the first slice of income, so read the question.

Interest in possession trust rates

Non-dividend income 20%; dividends 8.75%

Basic rate and dividend ordinary rate.

Holdover conditions

Gift immediately chargeable to IHT (s260): any asset. Gift not immediately chargeable (e.g. a PET): qualifying business asset only (s165). No relief if settlor-interested.

A joint election by donor and trustees is needed. Settlor-interested means the settlor, spouse or civil partner, or minor children (and certain other relatives) can benefit.

Quick revision

• Classify first: relevant property, interest in possession or bare trust.
• A bare trust is ignored for IHT; the beneficiary is treated as the owner.
• A lifetime transfer into a relevant property trust is a chargeable lifetime transfer.
• Lifetime IHT is 20% on the excess over the £325,000 nil rate band; the death rate is 40%.
• If the settlor pays the lifetime tax, gross up the net amount: the excess is multiplied by 100/80.
• Seven-year cumulation looks back seven years before each chargeable transfer.
• On death within seven years, tax is 40% less taper relief, minus lifetime tax paid, and never below nil.
• Taper relief starts only after three years: 20% for more than 3 and under 4 years, up to 80% for more than 6 and under 7.
• Periodic charge arises every ten years; exit charge arises when property leaves the relevant property trust.
• Reliefs such as business and agricultural relief can reduce the value charged inside the trust, if conditions are met.
• Gifts into trust are disposals for CGT at market value; check holdover relief.
• Trustees pay CGT at the higher rate of 24% and have a smaller annual exempt amount than an individual.

Common mistakes

• Treating every gift into a trust as a PET. Fix: Only gifts to individuals, bare trusts and certain qualifying trusts are PETs. A gift to a discretionary trust is a CLT.
• Using the old pre-2006 IIP rule for a new trust. Fix: Check the creation date and type. A lifetime IIP trust created after 21 March 2006 is generally relevant property.
• Treating the gift into a discretionary trust as a PET. Fix: Ask who receives the gift. A gift to a discretionary trust is a CLT, so test it for IHT straight away.
• Not grossing up when the donor pays the tax. Fix: Underline who pays. If the donor pays, use 20/80 on the excess and carry the gross figure into the cumulative total.
• Using the 40% death rate in the effective rate working Fix: Always use 20% for the hypothetical transfer. The 40% rate is for the death estate.
• Forgetting to multiply the effective rate by 30% Fix: Write 'rate = 30% × effective rate' as a line in every answer. The periodic rate must be below 6%. If it is not, check you used 20% not 40% and applied the 30%.
• Charging a periodic or exit charge on an IPDI trust. Fix: Check the interest is qualifying first. A qualifying IIP is treated as the life tenant's own property, so there is no periodic or exit charge.
• Treating creation of an IPDI as a transfer by the settlor in lifetime. Fix: An IPDI is created on death. It is part of the deceased's estate on death, and spouse exemption applies if the tenant is the spouse.
• Applying APR to the full market value of a farm. Fix: Split the farm into agricultural value and the excess. Apply APR to the first and consider BPR for the rest only if the farm is a trading business.
• Claiming RNRB against a transfer into a discretionary trust or a 10-year charge. Fix: Use the nil rate band only. The RNRB is a death-estate relief and needs a home closely inherited by direct descendants.

Exam tips

• Write the classification first. Marks are given for stating 'CLT because relevant property trust' or 'PET because bare trust'.
• Check the date of creation and the type of interest before you apply any rule.
• Show the nil rate band working and say who pays the tax. This decides whether you gross up.
• Use the tax tables for £325,000, 20%, 40% and taper percentages. Do not rely on memory.
• Add a short comment on consequences, such as seven-year survival or later trust charges, to earn the application marks.
• Write 'trustees pay' or 'donor pays' in the margin before you start. This one fact decides whether you gross up.
• Show the cumulative total as a short working. Markers award marks for the seven-year look back.
• If a death occurs, set out the NRB, the 40% tax, the taper percentage and the lifetime tax deducted on separate lines.