Reducing a Periodic Charge on a Discretionary Trust 

The Client

John is in his early 70s and created a discretionary trust seven years ago via an onshore bond for his Nil Rate Band.  John originally placed £325,000 into a Discretionary Gift Trust seven years ago via an investment bond.  He has no other trusts and has made no other gifts. 

The Investment Bond in the Trust is currently valued £457,307 (this represents a 5%pa net return) 

Should John’s Trust continue to grow at 5%pa net then at the 10th year the bond value would be £529,390. 

Assuming Nil Rate Band (NRB) of £325k then Periodic Charge would be £12,263 (6% of the excess over the NRB) 

The Solution

As part of the new registration of Trusts legislation John’s financial adviser is conducting a full Trust Review as outlined in the Trustee Act 2000. 

His financial adviser discussed the options available to the trust by utilising the 5% tax deferred regime of the bond to take a lump sum withdrawal and diversifying into an exempt Business Relief arrangement. 

John’s Trustees take £130,000 from the bond just after the 7th anniversary under the 5%pa tax deferred regime reducing the value of the bond to £327,307 (this withdrawal represents 8 years of 5%pa accumulated). 

The Trust then invests these withdrawn funds of £130,000 into an asset backed Business Relief solution 

At the 10th anniversary (assuming 5% p.a return) the Bond is valued at £378,898 and therefore the new expected periodic charge is £3,234.  At the same 10th anniversary using the same 5%pa return assumption, the Business Relief service would be valued at £150,491, however, there would be no periodic charge. 

This would reduce the overall periodic charge on the trust by a massive 73% 

The financial adviser has created a proper trust review as outlined in the Trustee Act 2000 and, by using Business Relief as an alternative investment within the trust has reduced the overall periodic charge. 

Important Information

Risk warning: Your capital is at risk.  Investments can fall as well as rise and investors may not get back the full amount invested. Investments in unquoted companies are less liquid and are higher risk than larger companies. The rates of tax, tax benefits and tax allowances described are based on current legislation and HMRC practice. They are not guaranteed, are subject to change and depend on personal circumstances. Please refer to the latest product literature before investing: your attention is drawn to the risks and fees contained therein. 

This document dated 7th December 2022 is intended for retail investors and their advisers and has been approved and issued as a financial promotion under the Financial Services and Markets Act 2000 by Stellar Asset Management Limited (‘Stellar’). This document is for information only and does not form part of a direct offer or invitation to purchase, subscribe for or dispose of securities and no reliance should be placed on it. Stellar does not offer investment or tax advice or make recommendations regarding investments. Stellar is authorised and regulated by the Financial Conduct Authority (Firm reference No. 474710). Registered in England No. 06381679. Registered office: 20 Chapel Street, Liverpool L3 9AG.