What is the ten-year anniversary charge on a discretionary trust?

Question

Accepted Answer

Here is a comprehensive answer to your question.

---

## The Ten-Year Anniversary (TYA) Charge on a Discretionary Trust

### What the law says

**The charge itself** is imposed by **IHTA 1984, s.64**: where immediately before a ten-year anniversary all or any part of the property comprised in a settlement is **relevant property**, tax is charged at the rate applicable under ss.66 and 67 on the **value of that property at that time**.

**The rate** is set by **IHTA 1984, s.66**:

- The rate is **three-tenths of the effective rate** at which tax would be charged on a hypothetical chargeable transfer. That hypothetical transfer is one:
 - whose value equals the aggregate of (a) the value of the relevant property charged under s.64, plus (b) the value of related settlements and same-day additions; and
 - made by a hypothetical transferor who has made chargeable transfers in the preceding seven years equal to the aggregate of (a) the settlor's own chargeable transfers in the seven years before the settlement commenced, and (b) amounts charged under s.65 (exit charges) in the ten years before the anniversary.
- Tax on that hypothetical transfer is calculated using the **lifetime rate** (s.7(2)), i.e. at 40% above the nil-rate band — meaning the maximum effective rate is 20%, and three-tenths of 20% gives a **maximum TYA rate of 6%**.

**Reduction for property not in the trust for the full ten years**: Where property was not relevant property, or was not comprised in the settlement, throughout the full ten-year period, the rate is **reduced by one-fortieth for each complete quarter** in that period that expired before the property became (or last became) relevant property in the settlement.

---

### HMRC guidance / practice

**Nature of the charge**: HMRC describes the TYA charge as the **"principal charge"**, one of two charges on relevant property trusts (the other being the proportionate/exit charge). It arises on **each ten-year anniversary** of the date the settlement commenced, and at ten-yearly intervals thereafter.

**What is charged**: The charge applies to the **chargeable value of the relevant property on the day before the TYA**. Business Property Relief and Agricultural Property Relief can be deducted to arrive at the chargeable value. Grossing-up never applies to the value at the TYA.

**Maximum rate**: The rate may be **anything up to 6%**. The rate and tax calculation uses the **current value** of the relevant property, but all other cumulative values used to calculate the charge are **historic (not current) values**.

**Quarters reduction in practice**: Where funds were settled later than the date of set-up (or last TYA), an allowance is made by expressing the ten-year period as **forty quarters** and calculating the number of whole quarters the property was relevant property. This fraction is then used to calculate the chargeable rate.

**Excluded/special trusts**: Certain trusts (e.g. trusts for disabled persons, employee trusts, pension funds, heritage maintenance trusts) do not contain relevant property and are therefore **not subject** to the ten-year anniversary charge under IHTA 1984, s.64.

**Practical example of rate**: In one decided case, HMRC calculated the TYA rate at **5.958%** on a trust with relevant property valued at £43,397,593.

---