A worrying 75 per cent of lifetime trusts have yet to file required IHT returns in respect of the periodic charge
The Finance Act 2006 must still be one of the most significant in memory for advisers operating in the estate planning market. Without warning, the government introduced sweeping changes to the way in which lifetime trusts were taxed, such that most became subject to the relevant property regime.
While on a practical level this limited the amount that could be placed into such trusts without creating a lifetime charge, it also broadly meant the assets within the trust were not included in any individual’s estate for inheritance tax purposes – a potential advantage over pre-22 March 2006 interest in possession trusts.
However, the potential lifetime charge at outset is not the only IHT charge applicable to relevant property trusts. There is also the periodic charge, potentially payable on the 10-year anniversary of such trusts, plus exit charges when capital leaves the trust. The question, now that we are well past the 10-year anniversary of the Finance Act 2006, is whether advisers are informing the predominately lay trustees of such trusts about their responsibilities for completion of tax returns (IHT 100) on these events.
Trustees will be required to submit an account to HM Revenue & Customs using form IHT 100, even if there is no tax to pay, unless the “aggregated” value of the trust is less than 80 per cent of the available nil rate band and the following conditions are met:
- The settlor was UK domiciled when the trust was set up and remains so at the time of the periodic charge;
- The trustees are UK resident and have been since the trust was created;
- There is no related settlement (i.e. no trusts created on the same day).If these three conditions are not met, an IHT 100 will be required irrespective of the aggregated value of the trust.
The aggregated value is the value of the trust at the 10-year anniversary, excluding any deductions/reliefs and including the value of the settlor’s chargeable lifetime transfers in the seven years prior to the trust’s commencement (or seven years prior to any additions, whichever is the highest), and any withdrawals during the 10 years of the trust.It is also worth noting, given the use of gift and loan schemes by advisers, that it is the full value of the trust that is used to determine the 80 per cent figure, so the value of loans are ignored (i.e. not deducted).Before we even get into the complexity of the periodic charge calculation itself, it is plain to see this is a difficult area even for experienced advisers, let alone lay trustees.
It cannot therefore come as any surprise that, according to HMRC’s figures published in May, 75 per cent of trusts have yet to file an IHT return in respect of the periodic charge for anniversaries during 2016/17.
Some of these returns could now be more than 20 months late, meaning HMRC might – and is highly likely to – apply daily penalties once the returns are eventually filed.
To be clear, the trustees, who will often include the settlor(s) as legal owners of the trust assets, have full responsibility for completion and submission of the IHT 100 and any supplemental forms, along with payment of any tax due.
The questions advisers should ask themselves are:
- Did I make it clear at the outset that the need for tax returns and potential liabilities would arise in 10 years’ time?
- To what extent am I as the adviser responsible for ensuring the trustees carry out these responsibilities?
- How sure am I that they have carried out these responsibilities and are not one of the 75 per cent racking up daily penalties?Much has and will continue to be written about the value and importance of intergenerational planning. At its simplest, this is ensuring an adviser maintains good relationships with the next generation.
If that next generation are trustees or beneficiaries of trusts that have failed to make appropriate returns, maintaining such relationships will be problematic.
Tony Müdd is the divisional director for development and technical consultancy at St. James’s Place