Discretionary trusts – associated operations and the ten year charge

The Chancellor’s pre-Budget Statement has duly been delivered to Parliament to the plaudits of (most of) his political supporters and the criticisms of his political opponents. For professional advisers concerned with the administration of trusts and the estates of deceased persons, it will have been something of a non-event. At least there were no unpleasant surprises. Tax planners will probably, on balance, be relieved that the Chancellor has not felt it necessary to take any action in response to the decisions of the High Court, confirmed by the Court of Appeal in Melville v IRC 2001 STC 1271.

Discretionary Trusts are certainly useful tax planning instruments. The “nil rate band” trust, where the chargeable transfer falls out of account after seven years may, for IHT purposes, be regarded as no more damaging than the straightforward PET. So long as the initial transfer is within the nil rate band there is no IHT to pay when the settlement is made. If the settlor survives for seven years then it will not affect the tax on the rest of his estate, passing on death, though it might affect the tax on a subsequent, failed PET as a chargeable transfer made within the seven years before that failed PET – See Section 7(1)(b) IHT Act 1984. And if the settlor dies within the seven years after the settlement was made? Well, even a PET of the same value would have become a chargeable transfer, effectively throwing a heavy tax burden on to the free estate passing on death.