HMRC Plans To Simplify IHT Charges On Trusts
On the 31st of May 2013, the HMRC published a consultation document called “Simplifying Charges on Trusts – the next stage”
The purpose of this consultation document was to make proposals for changes that simplify the way in which Inheritance Tax (IHT) Trust charges are calculated.
The HMRC believe that making changes to the way (IHT) Trust charges are calculated would remove a number of the practical difficulties involved in arriving at the amount of tax due. Whilst at the same time keeping the trust charges regime relatively intact.
They also state that these changes would address concerns stakeholders have around administrative burdens and professional costs.
If you want to read the proposals in full you can take a look at the Full Consultation Document
The document is 38 pages long and worth reading via the link above. Below is a summary of their proposed options for simplification:
• It is proposed that the settlor’s previous lifetime transfers should be ignored in determining the available nil-rate band for the purposes of calculating the hypothetical transfer on exit charges and ten-year anniversary charges. This will avoid the problems and associated costs of having to obtain historical records and valuations.
• The non-relevant property would also be ignored for the purposes of the calculation of periodic and exit charges as this relies on establishing the initial value and obtaining historical records. The advantage of these modifications would be that trustees would only be required to know information regarding exits from the trust and other trusts in the last ten years rather than potentially very old information.
• The nil-rate band should be split by the number of relevant property settlements which the settlor has made. This will alleviate the risk that settlors might seek to fragment ownership of property across a number of trusts to maximise the availability of reliefs or exempt amounts.
The consultation process has already concluded, the outcome of which will now lead to draft legislation on the treatment of accumulated income and the alignment of payment and filing dates.
This will be included in finance bill 2014 and Legislation on the nil-rate band and simplification of calculations will be included in finance bill 2015.
You can read more and follow updates at the UK.GOV Consultation outcome.
How Will These Changes Affect Your Existing Estate Planning
It is likely that legislation based on these proposals will be passed sometime in 2014 / 2015. Once in force, the legislation will affect Pilot Trust’s that have been set up as part of your estate planning.
The proposed changes would apply to all trusts (not just new trusts) so its worth reviewing your current estate planning with your consultant.
HMRC proposes that the amount of the nil rate band (NRB) available to a trust should not be calculated on a per trust basis, Instead they propose that the NRB should be split between all trusts which the settlor has made.
This will effectively mean an end to the use of ‘pilot trusts’ affecting anyone who has set up pilot trusts with the intention that those trusts will receive assets up to the nil rate band from their estate following their death.
A resource that I found very useful and goes into more detail about the changes and the impact of these proposals on pilot trusts is the blplaw website Changes to inheritance tax charges on trusts its well worth a read.