- May 2, 2017
- Posted by: Stephen Coleclough
- Category: Tax
Briefing note
Headlines
- Trustees of related party trusts.
- To the extent your trust has assets attributable to UK residential property you are now within the ten year charge regime.
- The charge is basically 6% of net asset value every ten years.
- Related party debts included as is collateral supporting third party debt.
- Being a remittance basis tax payer does not help at all.
- Life insurance is still a viable option if land held ultimately by an individual.
- Other IHT reliefs remain available to shelter IHT.
Who should read this?
Anyone who has a residential buy to let property or portfolio which is not ultimately owned by an individual, especially trustees of what are otherwise “excluded property trusts”.
Why should you read this?
If the portfolio is owned by a company, regardless of where the company is established, if an individual owns the shares then, any value attributable to UK residential property will form part of the individual’s taxable estate on death and potentially be subject to IHT at a rate of 40%.
Where the property company shares are held by trustees, one must consider the ten year charge to IHT.
This applies even if the settlor or beneficiary of the trust is a remittance basis taxpayer.
The ten year charge
Trusts do not die, so without special rules assets held in trust would escape death duties (now IHT). To counter this, IHT is charged on the net value of the trust assets every ten years.
The charge arises on the day before every tenth anniversary of the creation of the trust.
As admitted by HMRC in its manuals, the calculation of the IHT due is complex.
But in principle the charge is based on the value of property in the trust on the anniversary date, and how long it has been in the trust in that ten-year period by reference to quarters of years.
Under recent changes to the IHT regime, tax is charged on related party debt even if it is secured on the residential properties.
When is the trust’s first charge?
The trust’s first ten year charge is on the first ten year anniversary of the date the trust was created falling after 6 April 2017.
So if the trust was established in a year ending in a “7” and after 5th April in that year, an IHT charge is imminent.
If the trust was created in a year ending in “8”, then the charge will arise in 2018.
This bad news is countered by the fact that the charge only includes value for the quarters after this law change, so for 2017, a maximum of 3 quarters out of ten years, i.e. 3/40ths.
We set out in the table below a summary of the effect of the changes.
As the charge is 6% over 40 quarters, we have shown the amount accruing as 0.15% per quarter, and 0.6% p.a. and covering a full ten year period as well at some dates which are rapidly approaching.
| Value of UK residential portfolio after external debt | Additional tax due each quarter after April 2017 | Tax due (if trust established in yr ending with “7” or accrued in other cases | Tax accruing per annum | Tax accrued by end of 2018 | Tax accrued by end of 2018 | Tax accrued by end of 2022 |
| £1,000,000 | £1,500 | £4,500 | £6,000 | £10,500 | £34,500 | £60,000 |
| £10,000,000 | £15,000 | £45,000 | £60,000 | £105,000 | £345,000 | £600,000 |
| £20,000,000 | £30,000 | £90,000 | £120,000 | £210,000 | £690,000 | £1,200,000 |
| £50,000,000 | £75,000 | £225,000 | £300,000 | £525,000 | £1,725,000 | £3,000,000 |
| £100,000,000 | £150,000 | £450,000 | £600,000 | £1,050,000 | £3,450,000 | £6,000,000 |
| £150,000,000 | £225,000 | £675,000 | £900,000 | £1,575,000 | £5,175,000 | £9,000,000 |
| £200,000,000 | £300,000 | £900,000 | £1,200,000 | £2,100,000 | £6,900,000 | £12,000,000 |
Immediate actions to take
Firstly, find the date the trust was created and secondly calculate the first ten year charge (we can assist with this).
If the answer makes your eyes water, then call us.
Solutions
Depending upon the number of properties involved, mitigating IHT ten yearly charges could be expensive in Land Registry and conveyancing fees, so the above table indicates our view of when it is worthwhile considering planning which will reset the value clock at zero.
For smaller properties, more cost effective solutions, such as non UK pension schemes are available.
For those still on the remittance basis of taxation, then that must be factored in as well.
Avoidance
There are anti avoidance rules for sales and a targeted anti-avoidance rule which need to be considered, as well as the general anti-abuse rule (GAAR).
Glossary and small print
This note assumes that the reader has a knowledge of UK taxation of HNWIs and RNDs, and is either a client of this firm or an adviser to such a client, and is of course no substitute for advice based on your personal facts and circumstances.
No liability is accepted for reliance by any person upon any statement made in this paper.
Section 61(2) Law of Property Act 1925 applies to this paper.
Excluded property trusts are broadly speaking trusts established by persons who were non UK domiciled at the time the trust was created; HMRC – HM Revenue & Customs; IHT – inheritance tax; Remittance basis a taxpayer who has elected for the remittance basis of taxation; ten-year charge / TYC – the charge to IHT on the net value of assets held in a trust, currently 6% charged on every ten year anniversary of the trust; reference to UK / non UK is to the situs or residence as the context requires. TYC