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Finances / Finanzen » uk.finance » IHT calculation question regarding Interest in Possession Trusts
| IHT calculation question regarding Interest in Possession Trusts [message #385000] |
Sa, 06 Mai 2006 11:04 |
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Hi,
As many of you are aware, the tax treatment of trusts (such as IIP
Trusts) were recently alligned with the rules applicable to
Discretionary Trusts. So therefore, anyone who now goes down this route
is faced with the complications of calculating anniversary charges and
exit charges.
Whilst the calculation is not that difficult, there seems to be two
ways that people seem to use to calculate the anniversary charge (and
henceforth extrapolate the post-year ten exit charge from it)
Lets keep this simple. Assume no previous lifetime transfers or capital
payments from the trust in the first ten years.
Method One [Inland Revenue example]
Year Ten Value of Trust: =A3505,000
Assumed IHT Threshold in 2016: =A3450,000
The Revenue method will be:
Rise in value of trust property [=A3505,000 - =A3450,000] =3D =A355,000
Deduct 20% lifetime IHT from =A355,000 =3D =A311,000
Tax is 30% of this amount, so 3/10*=A311,000 =3D =A33,300 Tax Due.
OK, simple enough so far.
However, some people calculate the tax rate as a percentage.
OK, we know IHT at the 20% rate is =A311,000
However, this is extrapolated into an 'effective rate'
11,000
--------- =3D 2.18%
505,000
3/10 * 2.18% =3D 0.65% 'ten-year' rate
However, 0.65% of =A3505,000 is =A33,282.50
OK, not a million miles out, but enough to cause concern.
If anyone really knows about this subject, which one is the most valid
method.
I assume if the second is not correct, applying the percentage to an
exit charge based on the number of quarters since the anniversary
charge would also be incorrect ?
I suspect rounding the figures down to a 2 point percentage certainly
will have an affect on the calculation.
Can any accountant or actuary comment on what they would do ?
Rgds
Neil.
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| Re: IHT calculation question regarding Interest in Possession Trusts [message #385013 ] |
Sa, 06 Mai 2006 13:13 |
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In message <1146906259.048277.208720 [at] i39g2000cwa.googlegroups.com>,
neil [at] invidion.co.uk writes
>Method One [Inland Revenue example]
>
>Year Ten Value of Trust: £505,000
>Assumed IHT Threshold in 2016: £450,000
>
>The Revenue method will be:
>
>Rise in value of trust property [£505,000 - £450,000] = £55,000
Its not the 'rise in value' that is calculated but the excess over the
threshold for IHT. Your arithmetic is correct though.
>
>Deduct 20% lifetime IHT from £55,000 = £11,000
>
>Tax is 30% of this amount, so 3/10*£11,000 = £3,300 Tax Due.
>
>
>
>OK, simple enough so far.
>
>
>However, some people calculate the tax rate as a percentage.
>
>OK, we know IHT at the 20% rate is £11,000
>
>However, this is extrapolated into an 'effective rate'
>
>11,000
>--------- = 2.18%
>505,000
>
>3/10 * 2.18% = 0.65% 'ten-year' rate
>
>However, 0.65% of £505,000 is £3,282.50
The above is the method for calculating the effective rate for ensuing
exit charges, or for calculating the effective rate for a periodic
charge if there has been an exit during the preceding 10 years.
I.e. on exit in the 9th quarter the IHT would be :
..65% * (9-1) * Amount withdrawn /40
If, say, the amount withdrawn was £100k and the value at the 10th
anniversary was then £475k and the threshold was £460k then the periodic
charge :
475000+100000-460000*20 = 23000
23000/(475000+100000) = 4%
4% * 30% = 1.2%
Tax payable is 475000*1.2% = £5700
>
>I assume if the second is not correct, applying the percentage to an
>exit charge based on the number of quarters since the anniversary
>charge would also be incorrect ?
--
John Boyle
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| Re: IHT calculation question regarding Interest in Possession Trusts [message #385027 ] |
Sa, 06 Mai 2006 16:04 |
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Thanks John.
I've read the Revenue notes several times, and find them as confusing
as usual.
Using your calculation above, I take it that you always include
previous lifetime transfers and any withdrawals to the total to
calculate the effective rate, but you just apply this rate to the
actual value of the trust property at the anniversary date - [that is
assuming that any withdrawals have already been taxed by an exit
charge].
Neil.
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| Re: IHT calculation question regarding Interest in Possession Trusts [message #385031 ] |
Sa, 06 Mai 2006 17:34 |
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In message <1146924269.926824.211910 [at] j73g2000cwa.googlegroups.com>,
neil [at] invidion.co.uk writes
>Thanks John.
>
>I've read the Revenue notes several times, and find them as confusing
>as usual.
>
>Using your calculation above, I take it that you always include
>previous lifetime transfers
Yes, but only those within seven years preceding the date the settlement
commenced.
>and any withdrawals to the total to
>calculate the effective rate, but you just apply this rate to the
>actual value of the trust property at the anniversary date - [that is
>assuming that any withdrawals have already been taxed by an exit
>charge].
Thats right.
--
John Boyle
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| Re: IHT calculation question regarding Interest in Possession Trusts [message #385044 ] |
Sa, 06 Mai 2006 22:53 |
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OK, maybe I'm banging on this a bit now, but having worked through a
few examples, I'm getting just as confused again.
Just to be crystal clear, is the method you outlined above used for
calculating exit charges, or BOTH 10 year charges and exit charges.
Having looked at the Revenues booklet (IHT16), on page 12 it gives an
example, which is probably as complicated as it is likely to get in
most cases.
It shows:
Previous chargeable transfer in last seven years: =A3200,000
Chargeable transfer: =A3400,000
Withdrawal: =A380,000
Year 10 Value of Trust: =A3600,000
IHT Threshold: =A3263,000
How this is worked out is:
Add the previous transfer, withdrawal, and current value [=A3600,000 +
=A3200,000 + =A380,000] =3D =A3880,000.
Minus IHT Threshold =3D =A3617,000
Apply tax at 20% =3D =A3123,400
OK, nothing problematic so far.
However, it then shows that the amount of the previous lifetime
transfer + withdrawal are added together to give a total of =A3280,000
from which the nil-rate band is deducted.
This leaves =A317,000.
Apply tax at 20% =3D =A33,400
Then DEDUCT this amount from the taxable amount calculated above [as it
presumably has been taxed before] and this leaves =A3120,000
3/10 * =A3120,000 =3D =A336,000
An effective rate of 6%.
Now, using your calculations, we add everything together, deduct the
nil-rate band, apply tax at 20%, and we have again =A3123,4000.
However if I divide 123400 / (600000 + 200000 + 80000), this gives a
rate of 14.02%
14.02% * 30% =3D 4.21%
600000 * 4.21% =3D =A325,260
See why I'm going round in circles.
I've heard several times recently that you would need a fund of c.
=A320milllion to trigger a charge as high as 6%, but seemingly not
according to the Revenue's guidance.
Maybe it is just better to calculate the anniversary charge manually,
then work out the percentage from the answer, rather than work out the
percentage in order to calculate the anniversary charge.
Neil.
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