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Straight from HMRC’s mouth

Debate on the new trust alignment rules has been pretty much constant (among interested parties, of course) since the Budget day announcement. Much of the debate has been on the application of the discretionary trust regime to structures, particularly flexible and interest in possession trusts, that were taxed very differently before these new provisions were introduced.

The provisions, largely contained in Schedule 20, have now been enacted.

Despite some welcome emerging certainties, there are still some important uncertainties over how certain aspects of the discretionary trust rules will apply where the trust asset is a life insurance policy.

Technical Connection, led by my co-director John Woolley, entered into direct correspondence with HMRC Capital Taxes and as a result some very useful clarification has been secured.

In calculating the 10-year periodic charge on a discretionary trust, a number of factors need to be taken into account. These include:

l The value of the trust property at the 10-year anniversaryl The settlor’s cumulative total of chargeable transfers in the seven years before he established the settlement.

l Amounts that ceased to be relevant property in the previous 10 years, that is, amounts paid out of the trust.

In considering the latter point, the question arose as to whether, if the amounts paid out of the trust in the previous 10 years were not themselves subject to inheritance tax because, say, they fell within the nil-rate band effectively available to the trust, should they be brought into account as amounts “on which any charges to tax were imposed under section 65”?

HMRC Capital Taxes has now confirmed that such amounts do need to be brought back into account in determining the “aggregate value” referred to in section 66(3)(b) IHT Act 1984. Of course, it has been confirmed that loan repayments and payments to the settlor in satisfaction of his retained rights under a discounted gift trust do not constitute property ceasing to be relevant property.

Form 100c is used by trustees when making a return for inheritance tax on property ceasing to be relevant property. This means that this would be the form to be used if property was paid out of a trust, say, in the first 10 years of the trust’s existence.

On an exit within the first 10 years of the trust’s life, in determining the rate of tax to apply to the existing property, section 68 IHTA 1984 directs you to effectively calculate the rate of tax that would be payable on a hypothetical transfer that incorporates (and in most cases is only) the value of the property comprised in the settlement immediately after it commenced.

When completing the Form 100c in a case where the trustees have paid inheritance tax on a gift to the trust, there is some debate over what figure should be included in Box 2 – the whole of the payment made to the trust or that payment less any tax liability that the trustees have on receiving the gift to the trust made on the basis that the trustees, not the settlor, would pay the tax.

It is reasonably well known that either the donor or the trustees can pay the inheritance tax when property passes into the trust. In cases where the trustees are to meet the tax liability, should the value of the settled property immediately after the trust’s creation be the amount paid to the trustees less the inheritance tax liability payable by them or is it the gross amount received by them, unreduced by the as yet unpaid liability?

HMRC Capital Taxes has confirmed that the amount to include in the Form 100c is the gross gift except in cases where the trustees are under an enforceable obligation to pay the inheritance taxIt has also confirmed that where the settlor has made a substantial loan to the trustees on commencement of the trust, for the purposes of considering the value of the trust property at the 10-year anniversary, it is necessary to deduct any outstanding loan owed by the trustees at that time. This will probably not come as a surprise to many as the value of the settled property must be net of any legally enforceable debts.

Next week, I will look at the issues discussed with HMRC specifically in connection with the application of the discretionary trust regime to life policy trusts.


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