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Lightening the load

Raising the threshold on chargeable lifetime transfers significantly reduces advisers’ IHT compliance burden

Revenue & Customs last month announced widely anticipated proposals to raise the threshold for reporting inheritance tax chargeable lifetime transfers and 10-yearly periodic and exit charges on trusts.

The announcement is a very positive development and broadly to be welcomed, with the number of reports being required increasing sharply following the Finance Act 2006 18 months ago.

We have been working closely with HMRC since that time, going through in detail the impact of all the new rules, including the increased reporting burden, and we are pleased with the outcome in this area.

Last month’s proposals were good news for advisers. Principally, they should have the effect of significantly reducing the IHT compliance burden because far fewer CLTs will need to be reported. Currently, the thresholds above which a report is required are £10,000 for CLTs made in any one year and £40,000 for CLTs made over a 10-year period.

Under the new proposals, the thresholds at which CLTs will need to be reported will be raised to 70 per cent and 85 per cent of the nil-rate band, equating to £210,000 and £255,000 respectively for the tax year 2007/08.

Under these changes, the £210,000 threshold will also generally be applied to most trusts to determine whether a report is required at the 10-year anniversary.

HMRC also proposes to reduce the cumulation period for reporting purposes from 10 years to seven years. This will bring it into line with the seven-year cumulation period for calculating IHT on previous gifts, thereby introducing consistency and simplifying admin for advisers.

HMRC is also proposing a third test which advisers need to be aware of. This test will be based on the value of the assets to be transferred. If the limit of £210,000 is exceeded, reporting will be necessary.

Consider, for example, a person who invests £300,000 in a discounted gift trust. Given their age, withdrawals selected, sex and state of health, the retained rights (or discount) are valued at £120,000. The “before” value is £300,000, the loss to the estate (or gift) is £180,000.

Under the new test, the value of the assets to be transferred is £300,000 and thus exceeds the threshold of £210,000. Hence a report is required. It is worth noting that there is no tax to pay in this scenario but HMRC will retain a clear picture of the volume being invested into these trusts.

While on the subject of DGTs, HMRC also recently issued further notification that the interest rate assumption used for calculating the discount will increase to 6.75 per cent from September 1. This subtle change follows previous increases announced with their wider guidance notes issued in May. It is evident that HMRC has a clear understanding on how they expect these schemes to be managed until the increase in reporting thresholds. The good news is that the clarity being introduced should ultimately help simplify the compliance process for both HMRC and advisers.

The new reporting limits are still at the proposal stage but HMRC has confirmed that, subject to successful passage through Parliament later this year, they are intended to apply with effect from April 6, 2007. In the meantime, the current rules still apply. These state that reporting is not required for up to 12 months after the gift is made. In the interim period before the new proposals are introduced, advisers need to decide whether or not to defer reporting where possible until the new limits are introduced. However, where tax is payable, it is due broadly within six months of the gift.

Assuming that the proposals do make it through Parliament without a hitch, as expected, this will be positive news for advisers and clients. Following the changes brought by the Finance Act 2006, the existing reporting thresholds resulted in a cumbersome reporting burden for many advisers. The new levels are far more appropriate and will significantly reduce, perhaps by as much as 75 per cent, the number of IHT reports that need to be made.

Colin Jelley is head of tax and financial planning at Skandia

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