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Trusts containing 'relevant property' pay Inheritance Tax on transfers out of the trust and on the trust's ten year anniversaries. This guide explains the Inheritance Tax rules for trusts with relevant property and trusts without it.
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Assets in a trust such as money, shares, houses or land are known as 'relevant property'.
Most property held in trusts counts as relevant property. Inheritance Tax may be due on the assets held within a trust when:
The only exceptions to this rule are when the asset is:
For Inheritance Tax purposes, an 'interest in possession' trust is one where a beneficiary has the right to use the assets within the trust or receive any income from it. Assets put into an interest in possession trust before 22 March 2006 are not relevant property, so there is no Inheritance Tax to pay at the ten year anniversary.
During the life of the trust there is no Inheritance Tax to pay as long as the asset stays in the trust and remains the 'interest' of the beneficiary.
If the trust also contains assets put in on or after 22 March 2006, these assets are relevant property and a ten yearly Inheritance Tax charge may be due.
Between 22 March 2006 and 5 October 2008, beneficiaries of an interest in possession trust could pass on their interest in possession to other beneficiaries - for example their children - and retain the Inheritance Tax position. This was called making a 'transitional serial interest'. There was no Inheritance Tax to pay on assets moved into a transitional serial interest trust.
The new beneficiaries can also continue to benefit from the old Inheritance Tax rules for interest in possession trusts. In other words, the assets don't count as relevant property. This means there is no ten year anniversary charge.
As long as the asset stays in the trust and remains the 'interest' of the beneficiary there will be no exit charges.
From 5 October 2008 existing beneficiaries of an interest in possession trust can no longer pass their interest on as a transitional serial interest. If an interest is transferred after this date the trust assets become 'relevant property' and Inheritance Tax may be due on the ten year anniversary.
If someone acquires an interest in possession from a beneficiary who has died - either under the beneficiary's will or as a result of the rules of intestacy - the assets don't count as 'relevant property'. The beneficiary will continue to be treated according to the old rules for interest in possession trusts. This means there is no Inheritance Tax to pay at the ten year anniversary.
There will be no Inheritance Tax to pay as long as the asset stays in the trust and remains the 'interest' of the beneficiary.
A bereaved minor is a person aged under 18 who has lost at least one parent or step-parent. Where a trust is set up for the benefit of a bereaved minor, the assets in the trust are not regarded as relevant property. There will be no ten yearly or exit charges - as long as:
The Finance Act 2006 introduced a new category of age '18 to 25 trusts'. A trust for a bereaved young person can also be set up as an 18 to 25 trust.
As with a trust for a bereaved minor the ten yearly and Inheritance Tax exit charges don't apply for an 18 to 25 trust. However, the main differences are:
A trust set up for someone with a mental or physical disability is not a relevant property trust. This means there is no ten yearly charge.
Exit charges don't apply if the asset stays in the trust and remains the 'interest' of the beneficiary.
You don't have to pay Inheritance Tax on the transfer of assets into a trust for a disabled person as long as the person making the transfer survives for seven years after making the transfer. These sorts of transfers are called 'potentially exempt' transfers.
A bare trust is one where the beneficiary has an immediate and absolute right to both capital and income in the trust. Bare trusts are sometimes known as 'simple trusts' Someone who sets up a bare trust can be certain that the assets they set aside will go directly to the beneficiaries they intend. Once the trust has been set up, the beneficiaries can't be changed. The contents of the trust are treated as belonging to the beneficiary so they aren't 'relevant property', and there are no ten yearly charges or exit charges.
Transfers into a bare trust may also be exempt from Inheritance Tax, as long as the person making the transfer survives for seven years after making the transfer.