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The point of no return

New proposals could significantly reduce the number of taxpayers reporting chargeable lifetime transfers

Following changes contained in the Finance Act 2006, the ABI asked HM Revenue & Customs to raise the inheritance tax 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 was not able to change the limits (£10,000 in a single year and £40,000 over 10 years) for 2006/07.

HMRC has been considering how it might extend the regulations that excuse taxpayers from delivering accounts where there is no tax to pay in respect of chargeable lifetime transfers. It has formulated some proposals which are published on its website at http://www.hmrc.

The current regulations focus on the value transferred by a chargeable transfer. Under the new regulations, it is proposed that transfers will need to meet three tests:

  • First, that the value of the asset in the hands of the transferor before the transfer should not exceed a specified limit unless the loss to the estate arising from the transfer exceeds that value, when it will be the greater value that applies. In both circumstances, it is the value before the deduction of any liabilities, exemptions or reliefs that may apply to the transfer that is to be used.
  • Second, that the value transferred by the chargeable transfer should not exceed a specified cash limit.
  • Third, that the cumulative total of all chargeable trans-fers made by the transferor in the seven years preceding the current transfer, but including that transfer, should not exceed a specified cash limit.

It is proposed to link all these amounts to movements in the IHT threshold by stipulating that the cash limits should be maintained at a specified percentage below the IHT threshold applying at the date of charge. It is proposed that the regulations should include a formula to achieve this which is suggested might read “x per cent below the IHT threshold but rounded up to the next £5,000”.

For the first and second tests, it is proposed that the cash limit should be 30 per cent below the IHT threshold and for the third test 15 per cent below the IHT threshold.

In terms of the £300,000 threshold for 2007/08, this would give limits of:

Reduction Actual value

30% £210.000
15% £2500.000

It is proposed that the new regulations will apply from April 6, 2007 and comments on the proposals are required by August 31, 2007.

As far as discounted gift schemes are concerned, it is the gross value of the transfer that is relevant. Assume that a settlor invests £300,000 in a discounted gift scheme subject to a relevant property trust and the settlor’s retained rights are valued at £120,000. In this example, the gross value is £300,000 and the loss to the estate is £180,000. The transfer must be reported as the gross value exceeds the cash limit.

Clearly, if these changes go ahead as proposed, they should significantly reduce the number of taxpayers who have to deliver an account to HMRC and will be welcome news both for financial advisers and clients in terms of easing the admin burden.

A second development regarding discounted gift schemes concerns the interest rate that HMRC expects providers to use when calculating the value of the discount. In a technical note on discounted gift schemes issued by HMRC on May 1, 2007, it announced that the valuation basis would be kept under review. Since then, both the Bank of England base rate and gilt yields have continued to rise. In light of these increases, HMRC announced on July 19 that it proposes to raise the rate of interest used in valuing retained rights under discounted gift schemes to 6.75 per cent from 6 per cent from September 1, 2007.

The effect is that discounts calculated for cases completed after that date will be lower, probably between 2 and 7 per cent depending on the age of the client at outset.

This is an unwelcome announcement following the earlier reduction in discounts from June 1 but should emphasise the need to complete pipeline business before August 31.

Brian Murphy is financial planning manager at Axa Sun Life


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