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Chestertons News 29 September 2014

Inheritance Tax and Trusts - September Update

HMRC has been looking at ways of simplifying the inheritance tax system.

Nick Barnes, Head of Research

Inheritance Tax (IHT) and trusts

HMRC has been looking at ways of simplifying the inheritance tax system as it relates to trusts over the past couple of years. The third and most recent consultation, which ended on 29th August, has proposed changes to the current charges system which could have significant impact for anyone owning assets in trust.

What is the current situation?

It is currently possible for an individual to give away up to the Nil-Rate Band IHT Allowance (£325,000 for the tax year 2014/15) in any seven year period without incurring an IHT charge. Trusts can also make use of a Nil-Rate Band allowance in determining the IHT payable:

  • when a trust reaches a 10-year anniversary of its creation
  • when assets are transferred out of a trust or the trust comes to an end

Trust assets with a value below the Nil-Rate threshold are not subject to the 10-year anniversary and exit charges when they leave the trust. Prior to 2006 certain trusts fell outside these rules, as follows:

  • assets held in an "interest in possession trust" (i.e. one where a beneficiary has the right to income arising from it) were treated as belonging to the income beneficiary and the value was taxed on the beneficiary's death subject to his Nil-Rate Band. This continues to apply to a number of special cases:
  • "transitional serial interest" (life interest) trusts set up between 22 March 2006 and 5 October 2008
  • immediate post-death interests
  • trusts for bereaved minors
  • age 18 to 25 trusts
  • trusts for disabled beneficiaries
  • bare trusts (which are in truth simple nominee arrangements)

Read more in the full report...

What are the proposed changes?

HMRC has proposed the following changes:

  • to introduce a single trust lifetime nil-rate band allowance threshold (which is entirely separate from the nil-rate band for general inheritance tax purposes)
  • which means multiple trusts will no longer benefit from their own separate nil-rate thresholds;
  • replacing existing tax rates for 10 year and exit charges with a flat rate of 6% of the chargeable transfer, reduced in the case of exit charges to reflect the proportion of the10 years since the last charge or the property entered the settlement;
  • providing in legislation that accumulated income added to capital is IHT liable from the date at which the accumulation took place for the purpose of the 10 year and exit charge calculations;
  • deeming undistributed income arising to certain trusts to be accumulated and added to capital if it remains otherwise unaccumulated for more than five years at the date of charge;
  • alignment of IHT filing and payment dates for 10 year and exit charges;
  • additions to existing trusts will be deemed to create a separate trust and will

Read more in the full report...

What are the potential implications for you?

The proposed changes could have substantial negative implications for trusts and those who intend to set up a trust. In particular, anyone with multiple trusts could find themselves faced with a higher tax bill than previously. Many people may have set up trusts without being fully aware of the implications, for example in connection with life assurance.

The taxation of trusts is an extremely complex area and it is highly recommended that you consult with a specialist tax advisor in order to ascertain what, if any, action should be taken in response to the proposed changes. This applies equally to the changes already introduced regarding the tax treatment of offshore remittances used as collateral for obtaining and servicing loans in the UK.