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In recent years HM Revenue & Customs (HMRC) have launched a number of consultations into the Inheritance Tax charges on trusts, as we have previously reported. What was originally badged as ‘simplification’ is now being badged as a ‘fairer’ way to calculate Inheritance Tax (IHT) charges on trusts.
In essence, the main purpose of the consultations were to remove the tax advantages of creating multiple trusts and simplify the way in which Inheritance Tax charges are calculated in trusts.
By way of background, trusts are subject to an Inheritance Tax charge every ten years, however, it was possible to reduce or eliminate these tax charges by creating multiple trusts (so called ‘pilot trusts’) on different days. These trusts were topped up with assets at a later date – for example on death by will. Each trust could benefit from its own Inheritance Tax Nil Rate Band of £325,000 to reduce these charges. Of course, this tax advantage was what HMRC were trying to legislate against.
HMRC’s third consultation on this matter was launched in June 2014 and received much criticism. It was proposed that each individual would be entitled to one ‘Settlement’ Nil Rate Band which could be shared between all trusts created by that person since June 2014. We were led to expect all trusts from June 2014 would be affected – even though we didn’t have the final legislation at that point, which made giving advice very difficult. In addition to this, it created an added complication of having to calculate charges for pre June 2014 trusts one way and post June 2014 another way.
Of course this in no way simplified or represented a fairer way to calculate any Inheritance Tax charges.
As a result of the above, and due to pressure from professional bodies, the Government confirmed in their recent Autumn Statement that they will not be introducing a single Settlement Nil Rate Band for trusts.
The Government have, however, re-iterated their intention to target the use of multiple trusts in order to avoid tax. These proposed measures will not come into effect until April 2015.
The announcement that they will not be introducing the single Nil Rate Band for trusts has been welcomed by many tax advisors. Draft legislation proposing specific anti-avoidance rules to tackle situations where assets are added to more than one trust on the same day has now been produced with a view to removing the benefits of pilot trusts later this year.
As is often said, the one thing about tax is that it never stays the same for long and we will endeavor to ensure everyone is kept up to date with any changes. However, please seek advice before you do anything because the goal posts may have moved again.
Scott McIver, Assistant Tax Consultant
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