Changes to IHT Taxation of Trusts
UPDATE 13/08/2015 Further amendments have been made to the HMRC consultation that this article covers, an update can be found Here.
The latest HMRC Inheritance Tax Consultation Paper entitled A fairer way of calculating trust charges indicates that Changes to the IHT taxation of trusts will apply from the 6th of June 2014.
New rules proposed by HM Revenue and Customs will mean that an individual placing assets into multiple trusts will have to decide how they split their £325,000 Inheritance Tax allowance between the trusts.
Under the current Inheritance Tax rules, an individual can create a number of trusts as long as they are set up on different dates, each trust then has its own £325,000 nil rate band.
HMRC first consulted on changing the rules relating to “pilot” trusts in August 2013, so that the £325,000 nil rate inheritance tax allowance is split between the number of trusts, rather than each trust having its own £325,000 allowance.
In the updated HMRC Inheritance Tax Consultation on the proposed rules, it says respondents to the August consultation rejected the concept of an arbitrary split between trusts.
So instead those using multiple trusts will be able to divide the nil rate band between them as they choose. Married couples will be able to allocate their £650,000 allowance.
The new rules are set to come into force from April 2015, however once in place, they will be applied retrospectively from 6th of June 2014.
This is to prevent people taking advantage of the current rules to set up multiple trusts with their own nil rate bands before the new rules come in.
Trusts established before 6th of June 2014 will continue to operate under the current Inheritance Tax rules.
Currently, Inheritance Tax (IHT) is charged at a marginal rate of forty percent above the £325,000 nil rate band threshold.
Any amounts above the threshold that are placed in Trust are subject to a twenty percent “entry charge”, plus a six percent charge every 10 years.
Exit charges will also apply when the assets are taken out of a trust.
The HMRC consultation on the latest Inheritance Tax reforms closes on 29th August 2014.