Chartered Institute of Taxation (CIOT / CTA) Inheritance Tax, Trusts and Estates Advisory Syllabus

What is a discretionary trust and how is it treated for IHT?

A discretionary trust gives trustees discretion over who benefits and how much. No beneficiary has an interest in possession. It falls within the relevant property regime, suffering IHT entry charges, 10-year principal (anniversary) charges, and exit charges.

How is an immediate post-death interest (IPDI) treated for IHT?

An IPDI is an IIP trust created by will or intestacy where the beneficiary becomes entitled on the death. It is taxed under the old IIP rules: the trust property forms part of the life tenant's estate for IHT, so it is NOT relevant property and escapes the 10-year/exit charges.

What is the relevant property regime and which trusts does it cover?

The relevant property regime applies IHT periodic and exit charges to most trusts created after 22 March 2006, including discretionary trusts and most lifetime IIP trusts. Exceptions include bare trusts, IPDIs, disabled person's trusts and bereaved minors' trusts.

How is the IHT entry charge on a relevant property trust calculated?

The CLT is taxed at the lifetime rate on the excess over the available NRB (after deducting the settlor's chargeable transfers in the prior 7 years). Trustees pay at $20\%$; if the settlor pays, the value is grossed up at $\frac{1}{4}$ giving an effective $25\%$.

What is the maximum rate of the 10-year (principal) charge on a relevant property trust?

The maximum effective rate is $6\%$ ($30\%$ of the lifetime rate of $20\%$). The actual rate is usually lower because it is based on an assumed transfer using the available nil rate band against the value of the relevant property at the anniversary.

Outline the steps to calculate the 10-year anniversary charge.

1) Find the value of relevant property at the anniversary. 2) Compute a hypothetical IHT at $20\%$ on (value + settlor's prior chargeable transfers + related settlements/prior exits) less NRB. 3) Effective rate = $\frac{\text{hypothetical tax}}{\text{value}}$. 4) Actual rate = effective rate $\times \frac{30}{100}$. 5) Apply to the relevant property value.

How is the exit charge calculated for property leaving a relevant property trust before the first 10-year anniversary?

The rate is the 'settlement rate' computed using the value at commencement, charged at $20\%$, times $\frac{30}{100}$, then multiplied by $\frac{n}{40}$, where $n$ is the number of complete quarters between the start of the settlement (or last anniversary) and the exit.

How is an exit charge calculated between 10-year anniversaries?

Use the effective rate established at the most recent 10-year anniversary, then time-apportion: $$\text{Rate} = \text{effective rate at last anniversary} \times \frac{n}{40}$$ where $n$ is the number of complete quarters since that anniversary until the exit. Apply to the value leaving the trust.

What are the income tax rates applicable to discretionary trusts (the trust rates) for 2024/25?

Above the standard rate band of £1,000, discretionary trust income is taxed at the trust rate of $45\%$ on non-dividend income and $39.35\%$ on dividend income. Within the first £1,000 band, income is taxed at the basic/dividend ordinary rate ($20\%$ / $8.75\%$).

How is income from an interest in possession trust taxed?

Trustees pay tax at the basic rate: $20\%$ on non-savings/savings income and $8.75\%$ on dividends. There is no $45\%$ trust rate. The income belongs to the life tenant, who receives it with a tax credit and is assessed at their own marginal rates.

What is the tax pool in a discretionary trust and why does it matter?

The tax pool is the cumulative running total of income tax paid by the trustees (at trust rates) available to frank distributions to beneficiaries. Discretionary income distributions carry a $45\%$ tax credit; if distributions exceed the pool, trustees must pay the shortfall to HMRC.

At what rate are discretionary income distributions paid to beneficiaries, and how do beneficiaries treat them?

Distributions are treated as net of $45\%$ tax. The beneficiary grosses up the receipt by $\frac{100}{55}$, includes the gross amount as trust income (non-savings), and claims the $45\%$ credit — potentially reclaiming tax if their marginal rate is below $45\%$.

What is the CGT annual exempt amount and rate for trustees in 2024/25?

Most trusts get half the individual annual exempt amount, i.e. £1,500 (half of £3,000). Trustees pay CGT at $20\%$ on most assets and $24\%$ on residential property gains (rates from 30 Oct 2024 onward).

What is hold-over (gift) relief under s.260 TCGA 1992 and when is it available?

s.260 hold-over relief defers a chargeable gain on a gift that is an immediately chargeable transfer for IHT (e.g. a gift into a relevant property trust). The donee takes the asset at a reduced base cost (market value less the held-over gain). It applies regardless of asset type.

What is hold-over relief under s.165 TCGA 1992?

s.165 holds over the gain on a gift of qualifying business assets (e.g. assets used in a trade, unquoted trading company shares, or quoted shares of a personal company where the donor has $\geq 5\%$). The gain is deferred and deducted from the donee's base cost.

What restriction applies to s.260/s.165 hold-over relief for settlor-interested trusts?

Hold-over relief is denied (clawed back) where the settlor, their spouse/civil partner, or their minor unmarried children can benefit from the settlement. This prevents deferring a gain while the settlor retains an interest in the trust.

How is CGT computed when a beneficiary becomes absolutely entitled to trust assets?

There is a deemed disposal by the trustees at market value, triggering a chargeable gain (or loss). If the original transfer into the trust had a held-over gain under s.260, the trustees' gain on the deemed disposal can again be held over under s.260.

What is the order of administration for distributing a deceased's estate (the order of application of assets)?

Assets are applied to debts in statutory order: property undisposed of by will, then residue, then property specifically set aside for debts, then pecuniary legacies, then specifically devised/bequeathed property. Secured debts are first charged on the secured asset (s.35 AEA 1925).

How is income arising during the administration period of an estate taxed, and how do beneficiaries treat it?

Personal representatives (PRs) pay income tax at the basic rate ($20\%$ non-dividend, $8.75\%$ dividend) with no personal allowance and no trust rates. Residuary beneficiaries are taxed on income paid to them, grossed up at the relevant rate, with a credit for tax paid by the PRs.

What CGT applies to personal representatives during estate administration?

PRs acquire assets at probate (market value at death) — there is a CGT-free uplift on death. PRs pay CGT at $20\%$ ($24\%$ residential) on gains made when selling estate assets, with a full annual exempt amount (£3,000) for the year of death and the two following tax years.

What is a Deed of Variation and what are the conditions for its IHT/CGT effectiveness?

A Deed of Variation redirects a deceased's estate. To be read back for IHT (s.142 IHTA) and CGT (s.62 TCGA) as if the deceased had made it: it must be in writing, made within 2 years of death, signed by the original beneficiaries, contain a statement that the relevant section applies, and not be for consideration.

What is a disclaimer and how does it differ from a deed of variation?

A disclaimer is a refusal to accept a gift/inheritance, causing it to pass under the will's default provisions or intestacy — the disclaiming beneficiary cannot direct where it goes. A deed of variation lets the beneficiary specify the new recipient. Both can be read back if conditions are met; a disclaimer must be before accepting any benefit.

What is Quick Succession Relief (QSR) and when does it apply?

QSR reduces the IHT on a death estate where the deceased received a chargeable transfer (taxed) within the 5 years before their death, preventing the same assets being taxed twice in quick succession. It applies to the IHT on the later death.

State the Quick Succession Relief formula.

$$\text{QSR} = \text{tax paid on first transfer} \times \frac{\text{net transfer received}}{\text{gross transfer}} \times \text{relevant percentage}$$ The percentage is $100\%$ if the two deaths/transfers are within 1 year, reducing by $20\%$ for each subsequent year: $80\%, 60\%, 40\%, 20\%$ for years 1-2, 2-3, 3-4, 4-5.

What is double charges relief and give an example scenario where it applies.

Double charges relief (Inheritance Tax (Double Charges Relief) Regulations 1987) prevents the same value being taxed twice. Example: a donor makes a gift (failed PET) and the same asset is later in the death estate as a GWR. The regulations compute tax both ways and charge the higher, relieving the duplicate.

What is the effect of leaving at least 10% of the net estate to charity?

If a person leaves $\geq 10\%$ of their 'baseline amount' (net estate after exemptions, reliefs and the NRB) to charity, the IHT rate on the chargeable death estate is reduced from $40\%$ to $36\%$.

How can a Discretionary Will Trust using the nil rate band be an estate planning tool?

On the first death, an amount equal to the NRB (£325,000) is settled into a discretionary trust rather than passing to the spouse. This uses the NRB on first death while keeping value outside the survivor's estate, though it must be weighed against the transferable NRB available between spouses.

What is the transferable nil rate band (TNRB) between spouses/civil partners?

On the second death, the unused percentage of the first spouse's NRB can be claimed by the survivor's estate, so up to two full NRBs (and two RNRBs) may be available — a maximum uplift of $100\%$, giving up to £650,000 of standard NRB.

Compare a PET and a CLT in terms of immediate tax and the 7-year survival consequences.

A PET (gift to an individual) has no immediate IHT; it is fully exempt if the donor survives 7 years and only chargeable on death within 7 years. A CLT (gift into a relevant property trust) is immediately chargeable at $20\%$/$25\%$ above the NRB, with additional tax (up to $40\%$ less taper, less lifetime tax) if death occurs within 7 years.