Ten-Year Charge

A periodic inheritance tax charge on most forms of discretionary trusts, structured to balance the lack of generational transfer taxes.

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.

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

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

### What is a ten-year charge? - [ ] A charge applied to all types of trusts every ten years. - [x] An inheritance tax charge levied every ten years on certain discretionary trusts. - [ ] A fee for trust administration services every ten years. - [ ] A tax on earned income from trusts. > **Explanation:** The ten-year charge is a specific inheritance tax charge applied every ten years on discretionary trusts to ensure taxes are levied periodically, compensating for the lack of generational transfer taxes. ### How frequently is the ten-year charge applied? - [ ] Every year - [x] Every ten years - [ ] Every five years - [ ] Every twenty years > **Explanation:** As the name implies, the ten-year charge is assessed once every decade. ### What is the current rate of the ten-year charge? - [ ] 10% - [ ] 15% - [x] 6% - [ ] 20% > **Explanation:** The ten-year charge is calculated at 30% of the lifetime rate, which is currently 20%, hence the ten-year charge rate is 6%. ### On which type of trust is the ten-year charge primarily levied? - [ ] Charitable trusts - [x] Discretionary trusts - [ ] Family trusts without discretion - [ ] Insurance trusts > **Explanation:** The primary focus of the ten-year charge is on discretionary trusts, which are defined as relevant property trusts. ### What is the basis for calculating the ten-year charge? - [ ] Assessed value set by trustees - [x] Market value of the trust assets - [ ] Original contribution value - [ ] Annual income generated by the trust > **Explanation:** The ten-year charge is calculated on the market value of the trust's assets on the tenth anniversary and every ten years thereafter. ### When was the ten-year charge concept more rigorously defined? - [ ] Before 1970 - [x] After 31 March 1984 - [ ] In the early 2000s - [ ] After a 1990 tax law amendment > **Explanation:** The ten-year charge was more rigorously defined after changes made post-31 March 1984. ### Why does the ten-year charge exist? - [ ] To increase trust income. - [x] To compensate for the lack of generational transfer taxes on discretionary trusts. - [ ] To penalize income made by trusts. - [ ] To match the income tax rates. > **Explanation:** The charge exists to ensure that inheritance taxes are levied periodically on discretionary trusts that do not pass taxable assets through generations. ### Can the ten-year charge be avoided? - [x] With strategic estate planning possibly. - [ ] No, it applies universally. - [ ] Yes, easily by setting up lifetime gifts. - [ ] Only for trusts set up before 1984. > **Explanation:** While in general, it is applied broadly, strategic estate planning with professional guidance may sometimes mitigate the ten-year charge. ### What is the lifetime rate used in ten-year charge calculations? - [ ] 25% - [x] 20% - [ ] 10% - [ ] 40% > **Explanation:** The current lifetime rate applied in calculating the ten-year charge is 20%. Hence, 30% of this rate (6%) is used for the charge. ### Which type of trusts usually do not fall under the ten-year charge rule? - [ ] Discretionary trusts - [x] Non-relevant property trusts - [ ] Relevant property trusts - [ ] Any trust above $1 million in value > **Explanation:** Non-relevant property trusts generally do not fall under the ten-year charge rule. This charge is mainly applied to discretionary or relevant property trusts.

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Tuesday, August 6, 2024

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