What is the 10-Year Charge on UK Trusts?

Trusts are a widely used tool in the UK for managing and protecting assets, whether for tax planning, estate management, or passing on wealth to future generations. However, alongside the benefits of setting up a trust, trustees must also be aware of their tax obligations. One of the key taxes that trustees may encounter is the 10-Year Charge, a periodic tax that applies to certain trusts every ten years. Scrivener Tibbatts is increasingly being asked to make valuations on properties for tax planning purposes, writes Clive Scrivener, Partner at Wimbledon based Chartered Surveyors Scrivener Tibbatts.

The 10-Year Charge was introduced to ensure that trusts, particularly discretionary trusts, do not become vehicles for indefinitely avoiding inheritance tax. Since the assets in a trust may remain there for many years without being distributed, the 10-Year Charge acts as a way to ensure that some tax is paid on the trust’s assets during its lifetime.

It’s really important that you receive independent, accurate valuation advice. The valuation has a direct impact on the tax payable.

The 10-Year Charge (also known as the Periodical Charge) is a tax that applies to certain types of trusts, specifically discretionary trusts and other types of relevant property trusts. The tax is assessed every ten years and is based on the value of the assets held within the trust at the time of the charge. It essentially acts as a way for HMRC to collect tax on the assets that are being held within the trust for long periods, rather than waiting until the assets are distributed or the trust is dissolved.

The charge applies to trusts that are classified as “relevant property” trusts under UK tax law. This includes discretionary trusts, accumulation trusts, and some types of interest in possession trusts (set up after 22 March 2006).

The 10-Year Charge is levied every ten years from the date the trust was created. This means that if a trust was established on 1st January 2014, the first 10-year charge would be due on 1st January 2024, with subsequent charges following every decade.

The tax is calculated based on the value of the assets within the trust at the time the charge is due. This includes cash, investments, property, and other assets that the trust holds. Trustees must obtain up-to-date valuations of all assets before calculating the charge.

The maximum rate of the 10-Year Charge is 6% of the value of the trust’s assets above the available nil-rate band (currently £325,000, though this may vary). The actual charge could be lower, depending on several factors, including any previous lifetime transfers made by the settlor (the person who established the trust).

Key Considerations for Trustees

Accurate Valuations: The 10-Year Charge is an important tax consideration for trustees, and failing to account for it properly can lead to penalties from HMRC. An inaccuracy of £100,000 would accrue an additional tax charge of £6,000 so it’s essential that comparable evidence is analysed and the surveyor’s knowledge of the market comes into account. Obtaining accurate valuations of the trust’s assets is crucial. Trustees should engage professional appraisers for real estate, shares, and other valuable assets to ensure they have a reliable figure for the charge calculation.

Nil-Rate Band: The nil-rate band, which is the threshold below which no inheritance tax is charged, plays a significant role in determining the 10-Year Charge. If the total value of the trust’s assets is below this threshold, no charge will be due. Trustees should consider this in their financial planning.

Record-Keeping: Maintaining comprehensive records is essential. This includes details of the trust’s assets, their values, and any previous transfers. Good records help ensure that the charge is calculated correctly and help avoid potential disputes with HMRC.

Professional Advice: The rules surrounding trusts and the 10-Year Charge can be complex, and the calculation of the charge involves several moving parts. Trustees should seek professional legal and tax advice to navigate these requirements effectively.

For trustees managing discretionary trusts or other relevant property trusts, the 10-Year Charge is a crucial consideration in trust administration. It’s essential for trustees to plan ahead, ensure accurate asset valuations, and seek professional advice to comply with this tax obligation. By doing so, trustees can avoid unexpected tax bills and ensure the long-term success of the trust.

If you would like to discuss something related to a property valuation please contact Clive Scrivener direct via email at Clive@scrivenertibbatts.co.uk or call 020 8971 2983.