Exit charge

By Tolley

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

Exit charge
The occasion on which an exit charge arises
The basis of an exit charge
Calculation of the exit charge
Calculation of the exit charge before the first TYA
Calculation of the exit charge between ten-year anniversaries
Business property relief (BPR) and agricultural property relief (APR)
Exceptions from an exit charge

This document discusses how to calculate the income tax liability on the income of discretionary trusts and any trusts where income may be accumulated. It also covers rates of tax, income belonging to other persons, income used to pay trustees’ management expenses, and the standard rate band.

When trust property ceases to be relevant property, it becomes subject to a charge to inheritance tax. This charge is known as either:

•the exit charge
•the proportionate charge

IHTA 1984, s 65

This guidance note explains how to work out the amount of tax payable when an exit charge arises. It applies to occasions of charge which arise on or after 18 November 2015, which was the date of Royal Assent of the second Finance Act of 2015. F(No 2)A 2015 amended the rules for calculating the exit charge. The former method of calculation is outlined in the Calculation of exit charge before 18 November 2015 guidance note with a summary of the changes given below.

See the Relevant property guidance note for an explanation of what relevant property is.

This note should be read in conjunction with the Principal (10 year) charge guidance note. The comments made in that note on obtaining valuations are just as pertinent to the calculation of the exit charge.

The occasion on which an exit charge arises

An exit charge arises when trust property ceases to be relevant property.

As explained in the Principal (10 year) charge guidance note, relevant property is subject to a principal charge on each 10th anniversary after the trust was created. If property leaves the trust, it will escape the charge on the next 10-year anniversary, although it will have been relevant property for part of the 10-year period. To compensate for this, a charge is made to reflect the proportion of the period during which it was relevant property.

The usual occasion on which an exit charge arises is the distribution of capital to a beneficiary. This might be as a result of