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Periodic Charge

Also known as: Ten-Year Charge, Anniversary Charge

Definition

A periodic charge is inheritance tax of up to 6% that trustees must pay every ten years on certain trust assets exceeding the nil-rate band, primarily affecting discretionary trusts.

Understanding periodic charges is essential when considering discretionary trusts, as these charges recur every decade and can significantly erode trust funds over multiple generations if not properly managed.

What Does Periodic Charge Mean?

A periodic charge is inheritance tax charged on relevant property trusts every ten years under section 64 of the Inheritance Tax Act 1984. This charge primarily affects discretionary trusts and certain other trust types created after 22 March 2006. The tax is assessed on each ten-year anniversary of when the trust was created, not when property entered it—an important distinction for will trusts that begin on the testator's death. The government introduced periodic charges to prevent families from holding wealth in trusts indefinitely without paying inheritance tax. Without this charge, assets could pass through multiple generations in a discretionary trust, never triggering the IHT that would apply if property passed outright through successive estates.

The calculation involves valuing trust property on the anniversary date, deducting the available nil-rate band (currently £325,000, frozen until 2030), and applying a rate of up to 6%. This 6% maximum derives from 30% of the 20% lifetime transfer rate. The actual rate is often lower depending on the settlor's previous chargeable transfers and whether the trust qualifies for Business Property Relief or Agricultural Property Relief. Sarah created a discretionary trust in 2015 with £500,000. On the first ten-year anniversary in 2025, the trust is worth £600,000. Assuming Sarah made no other chargeable transfers and the trust made no distributions, the calculation would be £600,000 minus £325,000 equals £275,000 chargeable. At the maximum rate of 6%, the periodic charge would be £16,500. Trustees must complete HMRC form IHT100, file it within six months of the anniversary, and pay any tax due. Interest accrues on late payments, and trustees can face personal liability for non-compliance.

Several planning considerations significantly affect periodic charges. The related settlements rule means multiple trusts created by the same settlor on the same day are treated as a single settlement sharing one nil-rate band—a common pitfall when establishing multiple trusts for different beneficiaries. Distributions made from the trust in the ten years before an anniversary reduce the available nil-rate band, making it counterproductive to make partial distributions in year nine hoping to reduce the charge. Strategic planning often involves timing trust creation dates to avoid same-day settlements, investing in assets qualifying for Business Property Relief or Agricultural Property Relief (requiring two years' ownership before qualifying), or making distributions shortly after an anniversary when they won't affect the next periodic charge calculation for another decade. David's discretionary trust holds £800,000 in shares of his trading company, which qualify for 100% Business Property Relief. Despite the trust value exceeding the nil-rate band, no periodic charge is due because the qualifying business assets reduce the chargeable value to zero. However, the shares must have been held in the trust for at least two years before the anniversary. Importantly, the periodic charge rate established at each anniversary determines the exit charge rate for distributions made in the following ten years, making it crucial to minimize the periodic charge even when the actual tax due is modest.

Common Questions

"When does a discretionary trust have to pay the ten-year charge?" The periodic charge is due on each ten-year anniversary of when the trust was created, not when property entered it. For a will trust, this means ten years from the date of death when the trust began. Trustees must pay any tax due within six months of the anniversary or face interest charges.

"How much is the periodic charge on a discretionary trust?" The periodic charge can be up to 6% of the trust value exceeding the available nil-rate band (currently £325,000). However, the actual rate is often lower depending on the settlor's previous transfers and whether the trust qualifies for Business Property Relief or Agricultural Property Relief, which can reduce the charge to zero.

"Can I avoid the ten-year charge by emptying the trust before the anniversary?" No—this common strategy backfires because distributions made in the ten years before an anniversary actually reduce the nil-rate band available, increasing the charge on remaining assets. Unless you distribute the entire trust, partial distributions before the anniversary typically worsen the tax position. The optimal time for distributions is usually shortly after an anniversary.

Common Misconceptions

Myth: If I create multiple trusts for my children, each trust gets its own £325,000 nil-rate band for periodic charges.

Reality: Under the related settlements rule, all trusts created by the same settlor on the same day are treated as a single settlement sharing one nil-rate band. If you create three trusts on the same date, each with £200,000, they collectively share the £325,000 allowance, not £325,000 each. To maximize nil-rate band availability, trusts must be created on different days.

Myth: I can reduce the periodic charge by distributing capital from the trust in year nine, just before the ten-year anniversary.

Reality: This strategy actually makes the periodic charge worse, not better. Distributions made in the ten years before an anniversary reduce the nil-rate band available for the charge calculation, increasing the rate applied to remaining assets. Exit charges also apply to the distribution itself. Unless you're distributing the entire trust, partial distributions before an anniversary typically increase the overall tax cost.

Understanding Periodic Charge connects to these related concepts:

  • Discretionary Trust: Discretionary trusts are the primary trust type subject to periodic charges, making these charges essential to understand before establishing this flexible trust structure.
  • Relevant Property Trust: Periodic charges apply to relevant property within the meaning of IHTA 1984, helping readers understand the technical scope beyond just discretionary trusts.
  • Inheritance Tax: Periodic charges are a specific type of inheritance tax charge designed to prevent IHT avoidance through trusts across generations.
  • Exit Charge: Exit charge rates are calculated as a fraction of the most recent periodic charge rate, making periodic charge minimization important even when little tax is due.
  • Trust Taxation: Periodic charges are one element of trust taxation alongside income tax and capital gains tax considerations for comprehensive trust planning.
  • What Is a Trust? (And How Do They Work in Wills?): Understanding periodic charges helps you appreciate the long-term cost implications of discretionary trusts versus other trust types when planning your estate.
  • Using Trusts to Protect Your Estate: Periodic charges represent the tax cost of obtaining asset protection through discretionary trusts, essential for evaluating whether trust protection justifies the decade-by-decade expense.
  • Discretionary Trusts in Wills Explained: Periodic charges are a key tax implication of choosing discretionary trust structures, helping you understand the trade-off between flexibility and ongoing costs.
  • Nil-Rate Band Discretionary Trusts: This strategy specifically addresses periodic charges by sizing trusts to remain below charge thresholds while obtaining discretionary trust benefits.
  • Pilot Trusts for Inheritance Tax Planning: Understanding periodic charges is crucial for pilot trust strategies, which involve managing multiple trusts and their ten-year anniversaries over decades.

Need Help with Your Will?

Understanding periodic charges helps you make informed decisions about trust structures in your will. While discretionary trusts offer flexibility, the ten-year tax charges represent ongoing costs that affect your beneficiaries' eventual inheritance.

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Legal Disclaimer: This glossary entry provides general information about periodic charges and does not constitute legal or tax advice. Periodic charge calculations are highly complex and depend on individual circumstances including the settlor's lifetime transfers, trust distributions, and asset valuations. For advice specific to your trust, consult a qualified solicitor or tax adviser. Trustees have legal obligations to correctly calculate, report, and pay periodic charges, and may face personal liability for errors.