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Investigative reporting

Beware of the pitfalls in HMRC’s proposed new reporting levels for chargeable lifetime transfers

Last week, I commented on the recently reported “investigation” into lifetime transfers being made by HM Revenue & Customs to get a sense of the accuracy with which lifetime transfers, not otherwise reported as chargeable lifetime transfers over the reporting limits, are taken account of when calculating the inheritance tax due if the transferor dies within seven years of making the transfer.

However, I spent longer considering the proposals to considerably increase the reporting levels for CLTs. The main driver for change is for HMRC to minimise unnecessary paperwork when CLTs are made that will not trigger a liability to tax. With the reporting limits going up, no doubt HMRC will be even more interested in the extent to which otherwise unreported transfers are taken into account when determining IHT on the death of the donor within seven years of making the transfer.

If the proposals were to be enacted as set down, how would CLTs and periodic and exit charges under settlements be affected?

Chargeable lifetime transfers
These will only need to be reported when:

1: The value of the asset, before the deduction of any liabilities, exemptions or reliefs, owned by the donor before the gift – or, if greater, the loss to the estate – is more than 70 per cent of the nil-rate band rounded to the next £5,000 (£210,000 in 2007-08) or

2: The value of the lifetime chargeable transfer is more than 70 per cent of the nil-rate band rounded to the next £5,000 (£210,000 in 2007-08) or

3: The cumulative total of all chargeable transfers made by the donor in the seven years preceding the current transfer, but including that transfer, exceeds 85 per cent of the nil-rate band rounded to the next £5,000 (£255,000 in 2007-08).

Example 1

John intends to arrange a discounted gift plan based on a discretionary trust with an investment of £260,000. This represents a chargeable transfer of £200,000 after the discount. John has not made any chargeable transfers in the previous seven years.

The chargeable transfer is under £210,000 (condition 2) and the cumulative total is less than £255,000 (condition 3) but a report from John would still be required because the initial sum involved in the gift is £260,000, that is, above the £210,000 threshold (condition 1).

It would appear that if John wants to avoid the reporting requirement, all he need do is arrange the plan in two separate tranches. However, the detailed regulations may close off such an obvious escape route.

Periodic and exit charges for relevant property trusts

The rules here are slightly more complex but, broadly speaking, the basis is:

• Periodic charge. No report is required unless:
– The value of the trust property, including non-relevant property and any property transferred out in the previous 10 years, plus
– The chargeable transfers made by the settlor in the seven years before the trust started exceed 70 per cent of the ni-rate band rounded to the next £5,000 (£210,000 in 2007/08).

Example 2

John decides to go ahead with a plan. At the tenth anniversary, the value of the plan, allowing for the discount, is £153,000. The nil-rate band is then £440,000 and the threshold for reporting is therefore £310,000 (£440,000 x 70 per cent rounded to the next £5,000). An IHT 100 is thus not required.

• Exit charge. If this arises within the first 10 years, the 70 per cent threshold applies to:
– The value, at the date it became part of the settlement, of all the property in the settlement, plus
– The chargeable transfers made by the settlor in the seven years before the trust started.

If the exit charge occurs after the first 10-year anniversary, then no report is required if:

• None was needed at the previous 10-year anniversary, and
• There have been no additions to the trust since then, and
• There is and has been since the last 10-year anniversary no non-relevant property in the trust.

Example 3

John dies 19 years after the plan is set up and the death benefit, distributed by the trustees on wind up of the trust at the end of year 19, is £700,000. As there was no periodic charge at the previous 10-year anniversary and no additions have been made to the trust, no inheritance tax arises and no report is required.

If the trustees had delayed distribution until year 21, then there would have been a periodic charge at the end of year 20 and an exit charge report subsequently required unless the nilrate band exceeded the value of the trust’s assets at the 20th anniversary, which is unlikely.

HMRC’s proposals will make life much easier but there are still a few pitfalls to watch out for. Until the regulations are in place, it should be borne in mind that the current reporting rules apply. However, for transactions taking place on or after April 6, 2007, the 12-month time limit means the reporting limits should be known before the reporting deadline.

It will be interesting to see if and how these changes might be combined with any other changes that might be proposed as a result of HMRC’s current and ongoing investigations into lifetime transfers.

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