Quilter 15 We strongly recommend you discuss with your financial adviser the taxation of a discretionary discounted gift trust and whether these tax charges will apply to you. Entry charge When you place your investment into a discretionary trust there may be an initial tax charge of 20% to pay on some or all of your investment. This is called the ‘entry charge’. It represents half of the current rate of IHT. To calculate if an entry charge applies, you need to work out the total value of all your chargeable lifetime transfers (CLTs) over the past seven years and then add the value of the discounted gift (the residual fund). If this total is above the current nil-rate band for IHT, then the excess (up to the amount of the discounted gift) will be subject to the 20% entry charge. 10-Yearly periodic charge If after 10 years, and every subsequent 10 years, the value of the trust fund, less the discount (the settlor’s fund), is more than the current IHT nil-rate band, the trustees may need to pay a 10-yearly periodic charge. To work out if this charge applies, the trustees will first need to work out the value of the trust fund at the 10-year anniversary, less the revised 10-year anniversary valuation of the discount. This latter value is established in the same way as the original calculation of the discount (see page 10), taking into account the fact that you are ten years older. HM Revenue & Customs has confirmed that further medical information is not required for this unless the trustees are aware that your health has deteriorated, in which case, further medical information may be required as part of the discount valuation. If this tax charge does apply, it will be no more than 6% of the value of the trust fund. Exit charge There are no exit charges to pay on the withdrawals you receive as the settlor. However, any money paid to your beneficiaries may be subject to an exit charge of up to 6%. The charge is based upon the rate of the 10-yearly periodic charge at the last anniversary (see left) and how long it has been since that anniversary. Withdrawals paid to beneficiaries within the first 10 years of the trust’s creation are subject to a different calculation. Your financial adviser can guide you as to whether these charges may apply to you and your beneficiaries. What are the IHT charges associated with a discretionary trust? Whilst it is possible to avoid having to pay inheritance tax (IHT) on your death, there may be other IHT charges to pay. These IHT charges relate specifically to discretionary trusts and are briefly summarised below.