Definition
A relevant property trust is a classification for certain types of trusts established after March 2006 that do not qualify as interest-in-possession trusts, 18–25 trusts, or trusts established for the benefit of a bereaved minor. They are significant for inheritance tax purposes and are subject to taxes during creation, any distribution to a beneficiary, and on each tenth anniversary of the settlement.
Key Features:
-
Taxation Points: Taxed at three key intervals:
- Upon creation of the trust.
- Upon distribution of trust assets to beneficiaries.
- Each tenth anniversary of the trust’s settlement.
-
Exemptions: Trusts established for charitable purposes or as part of a superannuation scheme are exempt from these charges.
Examples
-
Creation of a Trust:
- When a grandmother establishes a trust in 2010 and transfers significant assets into it, inheritance tax is paid based on the value of the assets at the time of the trust’s creation.
-
Distribution to Beneficiaries:
- If the trust distributes some of its income or assets to a beneficiary in 2020, an inheritance tax charge may apply on the amount distributed.
-
Tenth Anniversary Charge:
- Every ten years from the trust’s creation, a value-based charge is calculated for inheritance tax, so in 2020, the value of the trust is assessed, and appropriate taxes are levied.
Frequently Asked Questions (FAQs)
What types of trusts do not qualify as relevant property trusts?
- Trusts such as interest-in-possession trusts, 18–25 trusts, and trusts established for bereaved minors are not classified as relevant property trusts.
When is inheritance tax payable on a relevant property trust?
- Inheritance tax is payable when the trust is created, on distributions to beneficiaries, and at every tenth anniversary.
Are there any exemptions to the relevant property trust taxes?
- Trusts established for charitable purposes or as part of superannuation schemes are generally exempt from these charges.
How is the ten-year charge calculated for a relevant property trust?
- The ten-year charge is based on the value of the trust at the tenth anniversary, and a percentage-based inheritance tax is calculated and applied to the assessed value.
Related Terms with Definitions
- Interest-in-Possession Trust: A trust where beneficiaries have an immediate right to income as it arises.
- 18–25 Trust: A trust for individuals aged between 18 and 25, often with specific terms until they reach the latter age.
- Inheritance Tax: A tax on the estate (property, money, and possessions) of someone who has died.
- Ten-Year Charge: A taxation charge assessed every ten years on the value of assets within a relevant property trust.
- Discretionary Trust: A trust where trustees have discretion over how income and capital distributions are made to beneficiaries.
Online References
Suggested Books for Further Studies
- “Trusts Law” by Graham Moffat
- “Inheritance Tax Made Simple” by Andrew Komarnyckyj
- “Principles of International Taxation” by Lynne Oats
Accounting Basics: “Relevant Property Trust” Fundamentals Quiz
### Which of the following is a key feature of a relevant property trust?
- [x] Taxed on creation and distributions to beneficiaries.
- [ ] Tax-free up to £325,000.
- [ ] Only applies to interest-in-possession trusts.
- [ ] Exempt from inheritance tax.
> **Explanation:** Relevant property trusts are taxed on creation, distributions to beneficiaries, and each tenth anniversary.
### What is a scenario that does NOT incur inheritance tax on a relevant property trust?
- [ ] Upon the trust's creation.
- [x] On distributions from superannuation schemes.
- [ ] Each tenth anniversary.
- [ ] Distributions to beneficiaries.
> **Explanation:** Trusts established for superannuation schemes are exempt from relevant property charges.
### How often is the ten-year charge applied to a relevant property trust?
- [ ] Every year.
- [x] Every ten years.
- [ ] Every five years.
- [ ] Every two years.
> **Explanation:** The ten-year charge is applied every ten years from the trust’s inception.
### Which types of trusts are generally exempt from the charges applied to relevant property trusts?
- [ ] All family trusts.
- [ ] Foreign trusts.
- [x] Trusts for charitable purposes and superannuation schemes.
- [ ] Corporate trusts.
> **Explanation:** Trusts established for charitable purposes or as part of superannuation schemes are exempt from relevant property charges.
### What is one type of trust that is NOT classified as a relevant property trust?
- [ ] Family discretionary trust.
- [x] Interest-in-possession trust.
- [ ] Corporate trust.
- [ ] Offshore trust.
> **Explanation:** Interest-in-possession trusts are specifically not classified as relevant property trusts.
### Which event triggers inheritance tax on a relevant property trust?
- [ ] Annual income generation.
- [ ] Property appreciation within the trust.
- [x] Distributions to beneficiaries.
- [ ] Establishing additional trustees.
> **Explanation:** Inheritance tax is triggered during distributions to beneficiaries from a relevant property trust.
### At what point does a relevant property trust incur its first inheritance tax charge?
- [x] Upon creation.
- [ ] On the first distribution.
- [ ] Annually.
- [ ] On the fifth anniversary.
> **Explanation:** The first inheritance tax charge is incurred upon the creation of the relevant property trust.
### What justifies an exemption from the ten-year charge on a relevant property trust?
- [x] Being set up for charitable purposes.
- [ ] Beneficiaries under age 30.
- [ ] Limited to low-value assets.
- [ ] Only administrative purposes.
> **Explanation:** Trusts set up for charitable purposes are generally exempt from the ten-year charge.
### What must be assessed to calculate the ten-year charge on a relevant property trust?
- [ ] Annual expenses.
- [x] The value of the trust.
- [ ] Trustee compensation.
- [ ] Market condition changes.
> **Explanation:** The value of the trust must be assessed to calculate the ten-year charge.
### Which type of legislation governs the classification and taxation of relevant property trusts?
- [ ] Corporate Tax Code.
- [x] Inheritance Tax Laws.
- [ ] Income Tax Regulations.
- [ ] Property Tax Acts.
> **Explanation:** Inheritance tax laws govern the classification and taxation of relevant property trusts.
Thank you for exploring the intricacies of relevant property trusts and enhancing your understanding through our thorough content and rigorous quizzes. Strive for excellence in your knowledge of trusts and taxes!
