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Almost two years after the first consultation, HMRC have now launched their third consultation into Inheritance tax charges and trusts. Over that time what was originally badged as ‘simplification’ is now being badged as a ‘fairer’ way to calculate Inheritance Tax (IHT) charges on trusts.
The consultation has attracted a reasonable amount of media comment - the Telegraph going so far as to suggest it will force elderly people to move out of the UK to shelter their assets from IHT as they will no longer have the same flexibility to use trusts. (NB You’d have to move your UK property abroad too).
By way of background, there are three occasions when IHT might be charged on a trust. These are when assets enter the trust, when assets leave a trust and, in between, on every ten year anniversary. The aim of the charges is (very broadly) to try and replicate the 40% tax charge every a generation that assets outside a trust are subject to.
In practice, most of these charges can be minimised by keeping the amount transferred into trust under the nil rate band, currently £325,000, and carefully timing the creation of the trusts. Only the value in excess of the nil rate band will suffer a charge. HMRC estimate that they receive only around 1,000 ten year charges forms each year.
The primary mischief perceived by HMRC is that with careful planning and good timing it is possible to establish a number of trusts each with their own nil rate band. This can enable individuals who settle assets on trust to shelter more than just one nil rate band’s worth of assets. The particular approach HMRC want to tackle is the creation of what are commonly called pilot trusts. Here a number of trusts are set up with, say, £10 of assets in each, over a number of days so that each gets their own nil rate band.
What HMRC are proposing therefore is that everyone has one nil rate band to use to relieve some of their estate at death, and another ‘settlement’ nil rate band which can be shared between all the trusts that person creates.
Importantly, for those with existing trusts, the consultation states that the new nil rate band rules will only apply to trusts created after 6 June - the date of the consultation. Therefore those with existing trusts should be able to continue to use the current rules when calculating the nil rate band that applies. They will also get another ‘settlement’ nil rate band on the 6 April 2015.
The reason for these ‘anti-forstalling’ measures to catch trusts created now is to prevent a flurry of trust creations before April next year.
Note also that adding property to trusts between 6 June 2014 and 6 April 2015 to an existing trust could potentially move that trust into the new regime - so if you are currently engaged in trust planning, take advice. Although it is important to bear in mind that we and other advisors are not advising on the actual law that will apply from next April. At present all we have to go on is a consultation which by its very nature is subject to change. Even though the proposals are on their third iteration, we also can’t assume that there will be a further year’s grace.
The fact that this has run to three consultations shows clearly the issues HMRC have had in coming up with an acceptable proposals. There are other elements in the consultation which are intended to simplify the calculations themselves, such as reducing the need to keep historic records. Under present rules you could have to look back up to 132 years when calculating an IHT charge on a trust at the end of its life! However, while this seems cumbersome, for someone in the field the current rules have been in place for some time and generally the required information is anticipated and retained. The new rules will require new information to be obtained and retained.
There’s a lot to consider in this consultation and the anti-forstalling elements mean that we have to take account of it now, so any one in the middle of planning may just want to pause for thought.
Helen Thornley, Tax Consultant
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