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HMRC internal manual

Inheritance Tax Manual

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HM Revenue & Customs
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Special trusts: temporary charitable trusts

Charging provisions: IHTM04103

Property transferred into settlement on trust for charity may be expressly limited to a certain period or may be subject to powers of revocation that can take the benefit away from the charity and give it to someone else. If that is the case, it does not qualify for unrestricted charity exemption.

Transfer into temporary charitable trust

The transfer into trust by a settlor is an immediately chargeable transfer.

Transfer of funds from a discretionary trust to a temporary charitable trust incurs a proportionate exit charge. (IHTM42110)

Taxation of the trust itself

The temporary charitable trust is not relevant property, so does not incur a ten year anniversary charge.

Cessation or distribution of trust

When the temporary trust ceases, or a distribution is made from the funds, or the trustees make a disposition which reduces the value of the property so held, a claim to inheritance tax arises. But there is no proportionate charge as for normal discretionary trusts. Instead, the flat rate charge is due. (IHTM42802)

  • Calculate the chargeable value on the usual ‘loss to the settlement’ basis. (IHTM42119)
  • If the distribution is made to a charity on a permanent basis, the transfer is exempt under IHTA84/S23.
  • If the assets had been in the temporary trust before, were taken out of the trust but then re-settled, use the start date as the last time they were put in the trust.
  • Do not count any complete quarter during the relevant period in which the property was excluded property. IHTA84/S70 (7).

Additional provisions under IHTA84/S70

  • You can exclude payments of administration costs and expenses so far as fairly attributable to the property in question from the inheritance tax charge. (S70(3))
  • You can exclude a payment which is (or will be) income of a person.
  • A charge does not arise merely because the trustees have made a bad bargain or have granted a lease for full consideration in money or money’s worth. (S70(4))
  • If the tax is being paid out of the remaining funds still held on qualifying trusts, the value of the fund is ‘less’ by the amount of the distribution plus the tax payable on that amount. These two elements constitute ‘the amount on which tax would be charged’ by virtue of IHTA84/S70 (5)(a).