Calculation of principal (10 year) charge before 18 November 2015

By Tolley
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The following Trusts and Inheritance Tax guidance note by Tolley provides comprehensive and up to date tax information covering:

  • Calculation of principal (10 year) charge before 18 November 2015
  • The basis of the principal charge
  • Calculation of a principal charge arising before 18 November 2015
  • Changes proposed under consultation and now abandoned

Trustees of a relevant property trust are charged to inheritance tax on each tenth anniversary after the trust was created. This charge is known as any of the following:

  • the principal charge
  • the periodic charge
  • the 10 year charge
  • the decennial charge

IHTA 1984, s 64(1)

This guidance note explains how to work out the amount of tax payable when the ten year anniversary fell before 18 November 2015 and the trust was created after 27 March 1974. Changes to the elements of the calculation were introduced in F(No 2)A 2015. The current method of calculation for occasions of charge arising on or after 18 November 2015 is described in the Principal (10 year) charge guidance note.

See the Relevant property guidance note for an explanation of what relevant property is and how the date of the anniversary is determined.

The basis of the principal charge

The principal charge is levied on the value of the relevant property owned by the trustees immediately before a 10 year anniversary of the trust. Therefore the first job in dealing with a principal charge is to establish a current valuation of the property within the trust.

The charge applies to all items on the capital account of the trust: cash, debtors and creditors are included in the valuation, as well as the primary trust investments.

As a general rule, the charge applies to income that has been formally accumulated to capital, but does not apply to undistributed income. However, an amendment introduced by FA 2014 requires income which has remained undistributed for five years or more to be treated as trust capital for the purpose of calculating the principal charge. This amendment applies to occasions of

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