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Take it to the limit

Following the changes to the inheritance tax treatment of trusts contained in the Finance Act 2006, the Association of British Insurers asked HM Revenue & Customs to increase the IHT reporting limits for chargeable transfers to reduce the number of returns made where no tax will be payable.

HMRC accepted higher limits in principle but were not initially able to change the limits (£10,000 in a single year and £40,000 over a period of 10 years). HMRC subsequently published proposals on how they might extend the regulations that excused taxpayers from delivering accounts where there is no tax to pay in respect of chargeable transfers and “relevant property” trusts and invited comments on the proposals.

It has recently published revised regulations for reporting requirements. The new limits for not having to report a chargeable lifetime transfer made by an individual on or after April 6, 2007 are as follows:1: Where the value transferred is attributable to either cash or quoted shares or securities and that value, together with the transferor’s chargeable lifetime transfers in the previous seven years, does not exceed the threshold for IHT for the year in which the transfer was made (£300,000 for the 2007/08 tax year and £312,000 for the 2008/09 tax year).2: For other transfers where:

  • The value of the chargeable lifetime transfer, together with the transferor’s chargeable lifetime transfers in the previous seven years, does not exceed 80 per cent of the IHT threshold (£240,000 or £250,000, depending on the year in question).

  • The value of the chargeable lifetime transfer does not exceed the IHT threshold less the value of the transferor’s chargeable lifetime transfers in the previous seven years. The purpose of this part of the test is to make it a requirement to deliver an account where the value transferred exceeds the IHT threshold that is available to the transferor – but the chargeable lifetime transfer that emerges remains below the threshold due to the use of exemptions or reliefs. An example of the interaction of the testsA transferor creates a relevant property trust in May 2007 and transfers £230,000 in cash to the trustees. No annual exemptions are available. There is no need to report the transfer as the value transferred is attributable to cash and is below the IHT threshold. Then, in May 2008, he transfers some shares in the family company to the trust. The loss to his estate is £100,000 but the shares qualify for 100 per cent business property relief. This transfer will need to be reported as, although the cumulative total of transfers remains within 80 per cent of the IHT threshold, the availability of business property relief is ignored for the purposes of applying the regulations.

    Thus the unreduced value transferred of £100,000 when added to the previous gift exceeds the IHT threshold available to the transferor and an account is therefore required.

    The effect on insurance-linked productsIn their explanatory notes on the reporting requirements, HMRC has specifically dealt with insurance-linked products, including discounted gift schemes.

    HMRC has advised that the value transferred will be attributable to cash if the transferor makes a transfer where he pays an amount in cash (or by cheque/bank transfer) and he then needs to take no further action to complete the transfer and cannot stop any further steps required to complete the transfer from taking place.

    This will usually be the case when an insurance-linked product and related trust documentation are all completed at the same time and the product is placed in trust at outset.

    However, where the transferor purchases an insurance-linked product, which he then subsequently places into trust, the non-cash 80 per cent limit will apply.

    These changes should significantly reduce the number of taxpayers who have to deliver an account to HMRC and will be welcome news for advisers and clients.

    Brian Murphy is financial planning manager at Axa Life

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