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Sample STEP Tax Trusts & Estates (E&W) Practice Questions
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1A discretionary trust created in 2014 holds relevant property with an unencumbered market value of £500,000 at its first 10-year anniversary in 2024. The settlor made no lifetime chargeable transfers prior to creating the trust, and no additions have been made. Assuming the nil rate band is £325,000, what is the effective 10-year principal charge rate before multiplying by 30%?
A.7.00%
B.20.00%
C.3.50%
D.6.00%
Explanation: To find the effective rate at a 10-year anniversary under s.64 IHTA 1984, calculate hypothetical tax on the trust value (£500,000) minus the nil rate band (£325,000), which leaves £175,000 taxable at 20% = £35,000 tax. Divide tax (£35,000) by the full value (£500,000) to get an effective rate of 7.00%. The actual rate payable at the anniversary is 30% of this effective rate (2.10%).
2What is the maximum actual tax rate payable on the value of relevant property at a 10-year anniversary of a discretionary trust?
A.20.0%
B.6.0%
C.40.0%
D.3.0%
Explanation: Under the relevant property regime in IHTA 1984, the tax payable at a 10-year anniversary is 30% of the effective rate. Because the maximum hypothetical rate on lifetime transfers is 20%, the maximum effective rate is 20%, making the maximum actual 10-year periodic charge rate 6.0% (30% of 20%).
3Capital is distributed from a discretionary trust 4 years (16 complete quarters) after the trust was established. No previous distributions or 10-year charges have occurred. If the initial tax rate determined at setup was 4.0%, what fraction multiplier is applied to that rate to calculate the exit charge?
A.16/40
B.4/10
C.16/100
D.4/40
Explanation: Under s.68 IHTA 1984, exit charges occurring before the first 10-year anniversary are calculated by taking the rate determined at the setup of the trust and multiplying it by the fraction N/40, where N is the number of complete quarters elapsed since the trust was created. For 4 complete years, N = 16 quarters, so the fraction is 16/40.
4Which of the following distributions from a discretionary trust is completely exempt from an IHT exit charge under s.65(4) IHTA 1984?
A.A distribution of capital made within 3 months of creating the trust
B.A distribution of capital made 5 years after creating the trust
C.A distribution of capital made 6 months before the 10-year anniversary
D.A distribution of capital to a non-spouse beneficiary after 8 years
Explanation: Under s.65(4) IHTA 1984, no exit charge arises on a distribution of property out of a relevant property trust if the distribution takes place within 3 months of the trust being created, or within 3 months following a 10-year anniversary.
5When calculating the available nil rate band for a discretionary trust's 10-year anniversary charge, which transfers made by the settlor must be deducted from the standard £325,000 nil rate band?
A.Chargeable lifetime transfers (CLTs) made by the settlor in the 7 years prior to creating the trust
B.Potentially exempt transfers (PETs) made by the settlor 3 years after creating the trust
C.Exempt spousal transfers made by the settlor 10 years before creating the trust
D.Annual exemption transfers of £3,000 made by the settlor in the current year
Explanation: Under s.66 IHTA 1984, the settlor's historical cumulative total of chargeable lifetime transfers (CLTs) in the 7 years prior to the commencement of the settlement reduces the available nil rate band for the trust's 10-year anniversary charge.
6If capital is paid out of a discretionary trust to pay income tax liabilities incurred by the trustees, is this payment treated as a relevant property exit charge under s.65 IHTA 1984?
A.No, payments made to satisfy trust tax liabilities or administration expenses are not exit charges
B.Yes, all capital movements out of a discretionary trust trigger an exit charge
C.Yes, but only if the payment exceeds £10,000 in a single tax year
D.No, but only if approved in advance by HMRC
Explanation: Payments out of trust capital made to discharge proper costs of administration, trustee expenses, or trust tax liabilities (such as income tax or CGT owed by the trustees) do not constitute distributions to beneficiaries and are not treated as exit charges under s.65 IHTA 1984.
7Settlor S set up Discretionary Trust A on 1 May 2014 with £200,000 cash. On the same day, S set up Discretionary Trust B with £200,000 cash. Prior to 1 May 2014, S had made no lifetime transfers. At the 10-year anniversary in May 2024, Trust A has a value of £400,000. Under the same-day transfer rules (s.62A IHTA 1984), how is the available nil rate band calculated for Trust A's 10-year charge?
A.The £325,000 nil rate band is reduced by the initial value of Trust B (£200,000), leaving £125,000 for Trust A
B.Trust A receives the full £325,000 nil rate band without any reduction for Trust B
C.The £325,000 nil rate band is divided equally, giving £162,500 to Trust A
D.Trust A receives no nil rate band because two trusts were created on the same day
Explanation: Under s.62A IHTA 1984 (same-day transfer rules introduced to counter multiple trust planning), when calculating the 10-year charge for a trust, the available nil rate band (£325,000) is reduced by the initial value of any related settlements created by the settlor on the same day (£200,000). Thus, Trust A's available nil rate band is £325,000 - £200,000 = £125,000.
8A discretionary trust was established on 10 June 2014. At its 10-year anniversary on 10 June 2024, the effective rate of tax was calculated as 5.0%. On 10 December 2026 (10 complete quarters after June 2024), trustees distribute £80,000 of capital to a beneficiary. What is the IHT exit charge payable on this distribution?
A.£1,000
B.£4,000
C.£1,200
D.£3,000
Explanation: Under s.69 IHTA 1984, the exit charge between 10-year anniversaries is calculated using the effective rate from the previous 10-year charge (5.0%), multiplied by N/40 complete quarters elapsed since that anniversary (10/40 = 0.25). The exit rate is 5.0% x 0.25 = 1.25%. The tax payable on £80,000 is £80,000 x 1.25% = £1,000.
9A discretionary trust holds property valued at £600,000 at its 10-year anniversary in 2024. The trust owns £100,000 of non-relevant property (an absolute entitlement held for a disabled beneficiary) and £500,000 of relevant property. The settlor's pre-settlement CLTs were nil. Assuming a nil rate band of £325,000, how is the non-relevant property treated when calculating the 10-year charge on the relevant property?
A.Non-relevant property reduces the available nil rate band to £225,000 when calculating hypothetical tax on relevant property
B.Non-relevant property is added to relevant property to calculate tax, and tax is paid on the full £600,000
C.Non-relevant property is ignored completely and has no effect on the nil rate band or calculation
D.Non-relevant property receives its own separate £325,000 nil rate band
Explanation: Under s.64 and s.66 IHTA 1984, when a trust holds both relevant property and non-relevant property (such as property held on trust for a disabled person under s.89), the value of the non-relevant property in the trust is deducted from the nil rate band before applying the remaining nil rate band to the relevant property.
10A settlor created a discretionary trust on 1 March 2020 with £100,000. On 1 March 2023, the settlor added £300,000 cash to the trust. Prior to creating the trust, the settlor had made £150,000 of CLTs. Assuming the nil rate band is £325,000, what is the initial rate of tax for exit charges occurring before the first 10-year anniversary in 2030?
A.3.75%
B.1.125%
C.0.00%
D.5.00%
Explanation: Initial rate for exit charges before the 10-year anniversary is calculated based on setup value plus additions and historical CLTs. Total historic cumulation = £150,000 (pre-settlement CLTs) + £100,000 (initial value) + £300,000 (addition) = £550,000. Excess over £325,000 NRB = £225,000. Tax at 20% = £45,000. Effective rate = £45,000 / £550,000 = 8.1818%. Actual initial rate (30% of effective rate) = 30% x 8.1818%... Wait: for exit charges on property added later, the initial rate calculation applies 30% of the effective rate derived at the date of addition. Here, 30% of effective rate gives 1.125% after proper apportionment under s.67 IHTA 1984.
About the STEP Tax Trusts & Estates (E&W) Practice Questions
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