I appreciate “happy anniversary” might be a bit of a stretch, but I think the point to take away here is this kind of topic, when speaking with your clients, does not need to be as complicated as you think! The 10-year anniversary charge (also known as the periodic charge) very much gives the game away in its name. When a Trust hits its 10th year anniversary, the trustees will need to pay a 6% charge on the assets that exceed the Nil Rate Band allowance (21/22 £325,000).
For example, if a Trust holds £425,000 of assets, on its 10th year anniversary a charge of 6% is applied only to the excess; in this case £100,000. This means that the trustees may have to pay a £6,000 10-year anniversary charge.
If the assets went into someone’s estate the IHT could be facing 40% on the whole sum which would be £170,000.
Now please note that the example above is a “client friendly” example and behind the scenes this calculation is very complex. Of course, we do not want to frighten our clients with this and so we need to explain this in simple terms to ensure the client understands the concept of it, and not the brain frazzling mechanics. We will leave that bit to the professionals! Also, periodic charges can be optional, depending on the advice received at the date of death.
From my experience as a Financial Planner, the 10-year charge is not a common barrier with clients. A Trust is a legal entity created to own, manage, and eventually dispose of the assets; therefore, we must understand that legal arrangements such as these come with charges. What you must ask your clients is are they happy to incur a 10-year charge of 6% or 40% Inheritance Tax charge with less passing to their loved ones. I know from discussions that I have had with clients their strong need to mitigate Inheritance Tax and protect the wealth they have spent their lives building up for their children deeply outweighs a 10-year charge. Now of course I appreciate that clients need to be made aware of this potential charge but if the issue is not explained in the right context, you could face clients abandoning the very planning, they need to give them the protection and real inter-generational tax benefits they desire. Of course, periodic charges, where relevant, have its place in the advice process and must be detailed in the reason why letter/engagement reconfirmation but should not derail any trust discussions in your meetings.
There are various ways to manage the assets around the 10-year charge through AIM investing or loans. Remember at Solidus we are here to guide you and your clients through this process. Solidus have advised so many of you on this subject as part of our trust fulfillment services after our sister probate company Adviser Trust & Probate Services has assisted clients with their probate.