Ten year anniversary: calculating the rate
Find the rate chargeable by adding up:
- The current value of the relevant property at the TYA (net of AR/BR)
- The historic value of any related settlements
- The historic value of any non-relevant property
to arrive at an assumed chargeable transfer. (IHTM42085)
Also find the previous cumulative total (IHTM42086), by adding
- The settlor’s personal cumulative total
- Any amounts subject to exit charges in the 10 years before the TYA
The aggregate chargeable transfer is the assumed chargeable transfer plus the previous cumulative total.
The tax on the aggregate chargeable transfer is then calculated in the same way as tax on lifetime transfers, deducting the threshold at the date of the TYA and multiplying by the lifetime rate of tax (20%):
The aggregate chargeable transfers, less the Inheritance Tax threshold, multiplied by 20% tax at lifetime rates = tax A.
Deduct the previous cumulative transfers, less the Inheritance Tax threshold, multiplied by 20% tax at lifetime rates = tax B.
Tax A less tax B = Tax C (the total tax chargeable at lifetime rates).
The TYA rate can then be calculated using the formula:
Tax C, divided by the assumed chargeable transfer, multiplied by 3 ÷ 10) = the settlement rate %
If any of the property has not been in the discretionary trust for the full ten years, allow relief for the number of quarters (40ths) that the property was not relevant property (IHTM42088).
Note: This may be the case following the changes that were made to the IHT rules for trusts in Finance Act 2006, where trusts that were previously subject to IHTA/S71 do not provide - or are not modified before 6 April 2008 to provide - for absolute entitlement at age 18 or 25.
For example, suppose that an accumulation and maintenance trust set up on 6 January 2000 provides that the beneficiaries will take interests in possession at age 25. If they have not done so before 6 April 2008, S71 will cease to apply at that date and the settled property will be relevant property going forward.
If there are no distributions or dispositions beforehand, the settled property will therefore have been relevant property for seven quarters by the time of the first periodic charge on January 2010
Summaries of the values required and application of the calculations and formulas are given in the earlier flowcharts.
- Mr G created a trust on 1 January 1996. Initial value of relevant property £400,000.
- Ten yearly anniversary on 1 January 2006. Value of relevant property now £1M.
- Capital payments to members of the appointed class in 1998 and 1999 total £167,000.
- A related settlement exists. Historic value £250,000.
- Part of the settled fund has been interest in possession from the beginning and remains so. £100,000 (not relevant property)
- At the date of settlement, Mr G’s personal cumulative total was £32,000.
The tax on £1M current relevant property is calculated as follows:
Add the value of the relevant property (£1,000,000), the historic value of the related settlement (£250,000) and the historic value of non - relevant property (£100,000) = £1,350,000. Then bring in the cumulative record (personal cumulative total of £32,000 plus proportionate charge of £167,000) = £199,000. This makes £1,549,000 the total of the aggregate chargeable transfers.
The relevant property of £1,000,000 is taxable at a rate based on £1,549,000 calculated as follows
£1,549,000 less nil rate band of £275,000 = £1,274,000, multiplied by 20 per cent = £254,800.
The previous cumulative transfers are below the IHT threshold at 1 Jan 2006, so no tax is directly attributable to them and no deduction needs to be made. So the effective rate is (£254,800 ÷ £1,350,000) × 100 = 18.874%. The settlement rate is 3 tenths of the effective rate = 5.662%.
The ten year anniversary tax on £1M at 5.662% is £56,620.
Inheritance tax on a straight £1M relevant property with none of the above factors would be £43,500. (£1M - threshold x 6%)