Definition
Ten-Year Charge
The Ten-Year Charge is an inheritance tax charge applied every ten years on most forms of discretionary trusts, also defined as relevant property trusts. This charge is intended to compensate for the lack of inheritance tax charges between generations since discretionary trusts are not attached to an individual’s life span. As of the current rules, the charge is calculated at 30% of the lifetime rate, effectively amounting to a 6% charge, given the lifetime rate of 20%.
Assets within the trust are valued at market value on the tenth anniversary of the trust’s establishment (if after 31 March 1984) and subsequently every ten years.
Examples
Example 1: Trust Established in 2000
A discretionary trust was established on June 1, 2000, and its assets are valued at $500,000 in 2010. As per the ten-year charge rule, the 2010 valuation is subject to a 6% charge of the current value at the tenth anniversary.
- Charge Calculation: 6% of $500,000 = $30,000
Example 2: Trust Established in 2010
A discretionary trust was established on June 1, 2010. The assets are valued at $800,000 in 2020. Again, these assets will be evaluated for the ten-year charge.
- Charge Calculation: 6% of $800,000 = $48,000
Example 3: Increase of Value in Assets
Consider a trust with assets valued at $1 million in 2012, and this value increased to $1.5 million by 2022. The ten-year charge will be assessed based on the $1.5 million valuation in 2022.
- Charge Calculation: 6% of $1.5 million = $90,000
Frequently Asked Questions
Q: Why is there a ten-year charge on discretionary trusts? A: The ten-year charge exists to ensure that inheritance taxes are periodically levied on discretionary trusts, as these trusts do not trigger transfer taxes upon the death of an individual, which can allow assets to pass through generations without tax.
Q: What is the current rate of the ten-year charge? A: The current rate is 6%, which is 30% of the lifetime rate of 20%.
Q: How is the market value of trust assets determined? A: The market value of trust assets is assessed based on current fair market value on the trust’s tenth anniversary and every ten years thereafter.
Q: What is a relevant property trust? A: A relevant property trust includes discretionary trusts and certain other types of trusts that do not benefit from favorable treatment for inheritance tax purposes.
Q: Are family trusts subjected to the ten-year charge? A: If family trusts fall under the definition of discretionary or relevant property trusts, they will generally be subject to the ten-year charge.
Q: How often do valuations need to be conducted for these trusts? A: Valuations need to be conducted every ten years on the anniversary of the trust’s initial establishment.
Q: What was the change after 31 March 1984 related to ten-year charges? A: Trusts established after 31 March 1984 are assessed for ten-year charges based on their market values every ten years from the trust’s inception.
Q: Can trusts be structured to avoid the ten-year charge? A: Consultation with a tax advisor is required, but generally, the charge applies broadly to mitigate tax avoidance through trusts.
Q: Is the ten-year charge a one-time payment? A: No, it is a recurring charge assessed every ten years on the specified trusts.
Q: When was the concept of ten-year charges implemented in taxation? A: The concept of a ten-year charge was more rigorously defined after changes post-31 March 1984 to fairly tax discretionary trust assets.
Related Terms
Discretionary Trust
A trust where trustees have discretion over how to distribute income or principal among beneficiaries.
Relevant Property Trusts
Trusts subject to the periodic ten-year charge and other relevant property charges under the inheritance tax regime.
Inheritance Tax
A tax on the estate (property, money, and possessions) of someone who has died.
Lifetime Rate
The specific percentage rate applicable to lifetime gifts and other transfers under tax laws.
Market Value
The estimated amount for which an asset would exchange on the valuation date between a willing buyer and a willing seller.
Periodic Charge
Regular assessments of tax due on trusts at specified intervals, like the ten-year charge.
Online References
- Gov.uk: Inheritance Tax
- HM Revenue & Customs Guidance on Trusts and Inheritance Tax
- Investopedia: Inheritance Tax Definition
Suggested Books for Further Studies
- “Trusts and Equity” by Gary Watt
- “Understanding Trusts and Estates” by Roger W. Andersen and Ira Mark Bloom
- “Text and Materials on the Law of Trusts and Equitable Remedies” by Graham Moffat
Accounting Basics: “Ten-Year Charge” Fundamentals Quiz
Thank you for exploring the details of inheritance tax and the intricate mechanics of the ten-year charge! Dive deeper into our provided resources to master financial terms and concepts.
