Nearly 1 million free-resource-downloads and-counting
Winner, Best Training Resources for Paraplanners 2019
How to Determine Periodic and Exit Charges on a Discretionary Trust

How to Determine Periodic and Exit Charges on a Discretionary Trust

Discretionary trust taxation came up on the most recent CII AF1 paper, and as much as we have covered this subject before, it seems a timely reminder for those thinking of sitting this exam in the future – also useful reading for J02, R03, R06 and AF5 exam takers.


Here is an example of how to work through a periodic charge and an exit charge calculation on a discretionary trust.

Discretionary Trust Example

Kim set up a discretionary trust in June 2008 with £700,000, and in June 2018, its value was £900,000. What was the periodic charge at year 10?

Value of trust = £900,000 – £325,000 (current nil rate band) = £575,000 x 30% x 20% = £34,500

£34,500/£900,000 x 100 = 3.8% (the effective rate)

The periodic charge is therefore £900,000 x 3.8% = £34,200.

If the trustees make a distribution of the total trust fund in the 11th year and the value of the fund is now £920,000, the exit charge is calculated as follows:

£920,000 x 4/40 (the number of 3 month periods since year 10) = £92,000 x 3.8% (the effective rate at year 10).

The exit charge is therefore £3,496.

Here's a helpful discretionary trust example that will be of interest to CII exam takers preparing for any of the J02, R03, R06 or AF5 exams. Click To Tweet


Remember a periodic charge occurs every 10 years, and it is the responsibility of the trustees to calculate, report and make the payment.  The rate used to work out the periodic charge is 30% of the lifetime rate of 20% i.e. 6%.  An exit charge can occur when capital distributions are made or when the trust comes to an end (although not where assets are transferred out of the trust within 3 months of its being set up or within 3 months following a 10-year anniversary).

Where a distribution is made in the first 10 years (i.e. before the first periodic charge), an exit charge will occur if there was an IHT charge at outset; however if there was no charge at outset, there are no exit charges in the first 10 years.

Trust taxation is a key part of AF1 but also appears, of course, in J02 and R03.

Grab the resources you need!

If you’re studying for your CII AF1 exam, and you’re wanting to feel more confident on exam day, grab our free taster to try out one of Brand Financial Training’s resources for yourself.  Click the link to download the AF1 calculation workbook taster now.

Click here to download our free calculation workbook taster for CII AF1

Alternatively, you can download the taster for AF5, J02, R03 or R06 if one of those exams is on the horizon for you.