The Autumn Statement confirmed that the nil rate band for inheritance tax would remain frozen at its current level of £325,000 up to and including 2017/18. This means that, assuming house prices and investment returns continue to increase, more and more people will be dragged into the IHT net over the coming few years. As a result, it seems reasonable to assume that the use of trusts for IHT mitigation purposes will be likely to increase also and focus will therefore be on how such trusts are likely to be taxed in the future.
On 31 May 2013, HM Revenue & Customs published a consultation document called Inheritance Tax: Simplifying Charges on Trusts – the next stage. The purpose of the consultation was to seek views on:
- proposals for simplifying the calculation of IHT on relevant property trust charges
- splitting the nil rate band available to trusts
- a deeming rule for the treatment of accumulated income
- proposals to align payment and filing dates to those of the self-assessment framework.
There was widespread agreement on the last two of these issues. One of the features of a discretionary trust is that there is no requirement on the trustees to distribute income to the beneficiaries as it arises. But, of course, this can cause problems when trying to value the trust at each 10 year anniversary.
Currently, income waiting to be distributed is not treated as trust capital whereas if it has been formally accumulated by the trustees, it is treated as capital. In order to deal with this issue the Autumn Statement proposes that from 6 April 2014 income that has not been distributed for more than five years will be treated as part of trust capital for the purposes of calculating the 10 year anniversary charge.
Another area of agreement was in trying to align the payment and filing dates. The time limit for delivering an account is currently 12 months from the end of the month in which the transfer is made or if later, three months from the date when the trustee first becomes liable for the tax. The time limits for paying IHT charges are:
- for chargeable events after 5 April and before 1 October, on 30 April in the following year
- for chargeable events after 30 September and before 6 April, six months after the end of the month in which the chargeable event took place.
To solve this problem, it has been decided that trustees of relevant property trusts must deliver the IHT account six months after the end of the month in which the chargeable event occurs and pay the tax by the end of the same period. This will ensure that returns and payments continue to be submitted evenly throughout the year.
As far as simplifying the calculation of IHT charges is concerned, the consultation document proposed the following changes in respect of the calculation of the 10 yearly periodic charge:
- the settlor’s cumulative total for the seven years before the trust is created should not be taken into account in calculating the IHT on the trust
- the rate of IHT payable on the trust should be 0 per cent on the property that falls within the trust’s nil rate band and 6 per cent on the property value in excess of the nil rate band
- the nil rate band available to a trust should be determined by dividing the current nil rate band by the number of relevant property trusts created by the same settlor that have been in existence in the last 10 years.
The most contentious issue here was the proposal to split the nil rate band between all the trusts created by the same settlor. There was widespread criticism in the consultation process of this proposal for a variety of reasons. One of which being that it would seem to be unfair if one of the trusts held, for example, nothing but a term assurance policy which would normally have a negligible value yet would still use up a significant proportion of the nil rate band.
Another point is that, in theory, all active discretionary trusts – whenever created – would be taken into account and this could cause a massive administrative problem for trustees who would need details of all those other trusts. Far from simplifying matters, the feeling was that HMRC would just be replacing one complex regime with another.
Finally, some responders to the consultation simply considered that it was unfair to apply the proposed new rules to existing trusts and settlors who had based their legitimate tax planning on the current rules.
It appears that HMRC has taken this opposition into account as it has announced that there will be a further consultation on this proposal with a view to introducing legislation in the Finance Bill 2015. We will therefore need to monitor developments in 2014 to see how this pans out.
Brian Murphy is financial planning manager Axa Wealth