The 10-Year Charge: What Trustees Need to Know
If you are trustee, you are legally responsible for managing the trust’s tax affairs, including reporting and paying any 10-year charge that may be due.
The 10-year charge, also known as the periodic charge or principal charge, is an Inheritance Tax (IHT) charge that can apply to certain UK trusts, particularly discretionary trusts and other trusts within the relevant property regime.
Every 10 years, these trusts may be subject to an Inheritance Tax charge based on the value of the assets held within the trust.
How much is the 10-year charge?
The maximum rate is 6% and the amount payable will depend on the circumstances of the trust, including the value of the trust assets at the 10-year anniversary, any Nil Rate Band already used when the trust was established and any additions made to the trust since it was created.
The current Nil Rate Band is £325,000, although this is subject to change.
A periodic charge may still need to be reported to HMRC even where the value of the trust is below the current Nil Rate Band. This can apply where, at the 10-year anniversary, the value of the trust fund if more than 80% of the available Nil Rate Band, provided the relevant conditions are met.
Which trusts are affected?
The 10-year charge generally applies to discretionary trusts and most lifetime trusts that do not qualify for special relief.
It does not usually apply to bare trusts, certain interest in possession trusts or trusts for disabled beneficiaries where the relevant conditions are met.
When is the 10-year charge due?
Trustees must determine whether an IHT charge is due every 10 years from the date the trust was created.
For a lifetime trust, this is generally the date on which the trust deed was signed and executed. For a Will trust, the 10-year period generally begins on the date of the settlor’s death.
Any IHT due must be reported to HMRC and paid no later than six months after the end of the month in which the 10-year anniversary falls.
Trust Registration Service
Most trusts must also be registered with HMRC’s Trust Registration Service (TRS) within 90 days of being created or becoming liable for a relevant tax. Will trusts are generally exempt from registration for the first two years following the settlor’s death, subject to the applicable conditions.
Trustees of taxable trusts must also confirm annually that the trust’s details are accurate and up to date. This declaration must generally be made by 31 January each year, even where no IHT charge is due for the trust.
Professional advice
Trust taxation can be complex, and the rules surrounding the 10-year charge, reporting obligations and Trust Registration Service requirements can vary depending on the type and circumstances of the trust.
If you are a trustee approaching a 10-year anniversary, it is important to establish whether an Inheritance Tax charge or reporting obligation arises and to ensure that any required returns and payments are made within the relevant deadlines.
Taking professional advice well in advance can help trustees understand their obligations, consider appropriate planning opportunities and avoid unnecessary penalties or interest.
Kamila Jaskula is a Private Client Executive in the Private Client Team at Barker Gotelee Solicitors in Suffolk.
If you are a trustee and would like advice on the 10-year charge or your wider responsibilities in managing a trust, please call our Private Client Team on 01473 611211, or fill in our enquiry form below.
