What are Entry, Exit, and Periodic Charges in Trusts?

Note: The following article is part of our Complimentary Articles Series, designed to provide additional insights and detailed information on specific topics within estate planning.

In conjunction with the following article, we recommend you review the following pillar articles to understand inheritance taxes and Trusts comprehensively.

• What is Inheritance Tax (IHT)?
• How Do I Pay Inheritance Tax to HMRC?
• How Much Inheritance Tax Do I Have to Pay?
• When Does IHT Need to Be Paid?
• What is a Trust?
• Why Should I Give Assets into a Trust During My Lifetime?

Caution: While this article clarifies some common misconceptions about tax compliance in your estate planning, the content serves as a guideline only. When making tax-related decisions, always consult a tax professional.

INTRODUCTION

Understanding the tax implications of Entry, Exit, and Periodic Charges is fundamental in the Trust aspects of estate planning since these charges are related to the movement of assets in and out of Trusts.

In addition, these charges belong to the Inheritance Tax (IHT) category, as they represent the primary points where Trust asset values are assessed for IHT purposes.

However, before we explore these charges, let's recap some key terms to avoid repetition in our later definitions.

The Role of the Settlor

• The individual (or legal entity) who transfers assets into a Trust is known as the Settlor.

• The Settlor sets the terms and conditions of the Trust and dictates how the assets are to be used and managed.

• The assets transferred into the Trust can include money, property, or other investments.

• Once the Settlor creates the Trust for the benefit of the named Beneficiaries, its assets are managed by Trustees in accordance with the Settlor's specific instructions.

Chargeable Lifetime Transfer (CLT)

• A CLT occurs when a Settlor transfers a total amount of assets into a Trust during their lifetime.

• If the total assets transferred (i.e., "the total amount"), along with gifts made by the Settlor in the previous seven years, exceed the Nil-Rate Band (NRB), the transfer is classed as a CLT.

Nil-Rate Band (NRB)

• The NRB is a fixed Inheritance Tax threshold, which is currently £325,000.

• Transfers of assets into a Trust below this threshold are generally exempt from IHT charges.

• Trustees are individuals or entities the Settlor appoints to manage the Trust and ensure that the Beneficiaries' interests are protected per the Settlor's instructions.

Having clarified these definitions, this article lays out Entry, Exit, and Periodic Charges, shedding light on their role in Inheritance Tax assessments and their impact on estate planning. 

ENTRY CHARGES

Entry Charges apply when assets are transferred into a Trust, which triggers a CLT.

• Below the NRB Threshold: No Entry Charge is typically applicable if the total amount of assets is under the NRB threshold.

• Above the NRB Threshold: A 20% Entry Charge is applied to assets that exceed the NRB threshold. This is regarded as a pre-payment and part of the fully realisable IHT liability upon the Settlor's death.

EXIT CHARGES

Exit Charges are usually assessed after the first 10 years, when assets are distributed or leave the Trust.

• 10-Year Consideration: Calculating Exit Charges within the first 10 years of establishing the Trust can be complicated because the tax is partly based on the length of time the assets have been held in the Trust since the last 10-year anniversary. The calculation depends on asset values, the elapsed time since the previous 10th anniversary, and the availability of the nil-rate band. The nearer the timing of asset distribution is to the 10th anniversary of a Trust, the greater the likelihood of incurring a higher Exit Charge.

• Implications Regarding the NRB: No Exit Charges are typically levied if the distributed assets fall below the NRB threshold. Conversely, for asset distributions above the NRB threshold, the Exit Charge is based on the excess amount over the threshold, considering the length of time the assets were placed in the Trust.

PERIODIC CHARGES

In addition to Entry and Exit fees, certain types of Trusts, such as Discretionary Trusts, may be subject to Periodic Charges. Every 10 years, the Periodic Charges evaluate the property value of the Trust to monitor whether any IHT is owed based on the available NRB at that time.

• Basis of Calculation: Periodic Charges are based on the value of the Trust's assets exceeding the available NRB at the time of the charge.

• Rate: The Charge is typically 6% of the value over the NRB, taking into account any applicable reliefs or exemptions.

• Differentiation: Unlike Entry and Exit Charges, which are related to the transfer of assets into and out of the Trust, Periodic Charges are an essential part of long-term Trust administration and valuation of the Trust's assets over time.

WHEN IN DOUBT, CONSULT A TAX PROFESSIONAL

Handling Trust-related tax issues can be complex, requiring careful planning and timing, especially within the first 10 years. This is especially critical for assets with fluctuating values over time or if you're thinking of planning asset distribution around a 10th tax anniversary.

If your Estate is complex or you're in doubt about any tax aspect, we recommend you seek guidance from a tax professional to ensure full compliance and err on the side of caution.

Need to know more?

You can also speak to a qualified estate planning company for a free initial consultation to discuss your options. Since we have the expertise to assess your Estate and understand your unique requirements, we can suggest appropriate lawful approaches for tax planning and estate administration, putting you in contact with our legal and tax experts where applicable.

Book a callback, and we'd be happy to arrange a no-cost, no-obligation discussion with you to lay out the options available.

Alternatively, call us on 01233 659 796.

Or reach out to us here.