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Tony Mudd: The known unknowns of IHT

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I have been reading Tony Wickenden’s series of articles on the simplification of the inheritance tax charges on trusts that followed HM Revenue & Customs’ third consultation paper on its proposals for revising the calculation for relevant property trusts.

Wickenden deals with the complex issues with the required expertise, while also using layman’s terms to enable a practical digestion of the relevant facts.

He acknowledged at outset that more detail is required but understandably stuck with the things that are known. 

However, to quote Donald Rumsfeld: “There are known knowns… We also know there are known unknowns, that is to say that there are things we now know we don’t know.”

This is certainly the case with these proposals and a number of these unknowns will have a very real and significant impact on future planning. 

For example, many clients will have protection, term assurance or whole of life policies written under a discretionary trust. Whether the reason for doing so is part of a tax-planning exercise or is for practical succession, the HMRC changes are not clear on whether future premium payments would be an addition to a pre-7 June trust.

On a different, although similar, vein, many clients will have invested some of their wealth into investment bonds, most of which will provide the investor with a contractual right to add funds to their bond. What we need to ask is:

  • Will any additions where an existing investment bond was placed in trust on or prior to 6 June added to by the settlor after that date be treated as a hybrid trust?
  • Will the bond be subject to both the existing and new rules or will it remain subject to the old rules in its entirety?
  • If it is to be a hybrid of existing and new rules, if capital is withdrawn from the trust for the benefit of the beneficiary, from which element of the trust will the capital be deemed to have been withdrawn?

Then we have spousal bypass trusts, predominately pilot trusts used in conjunction with an existing pension arrangement, so in the event of the death of a member before taking full benefits, the scheme trustees may pay any death benefits into the trust for the benefit of the member’s family. The benefits of this are well-rehearsed: asset protection, succession and tax planning. What is equally well understood for IHT purposes is that the date of the settlement for tax purposes has always been the date the individual or the employer effectively first began making pension contributions.

What do we not know?

  • If, after 6 June, trustees of a scheme into which a client or their employer had contributed to prior to 6 June appointed funds to a discretionary trust created by the member prior to 6 June, would the trust fund be changed to IHT under the existing rules, the new rules or the hybrid of existing and new rules?
  • Does the position change where the member or their employer continues to make contributions to the scheme after 6 June?
  • If the member or the employer first made contributions to the pension on or prior to 6 June but the discretionary trust was created after the 6 June, for the purposes of receiving any death benefits, would the trust fund be charged IHT under the existing rules, new rules or a hybrid of existing and new rules?

Finally, in respect of deeds of variation dated after 6 June containing the appropriate election under section 1.4.2 (1IHTA 1984) and completed within two years of death where the deceased died on or before 6 June, and which varies the will or intestacy to create a relevant property trust, will such trusts and the funds settled from the estate be charged under the existing or the new rules?

There are other examples but I have selected those that involve the more commonplace planning and so could cause the greatest problems. 

Perhaps what we should be worried about are the “unknown unknowns. The things we don’t know we don’t know.” 

Tony Mudd is divisional director of development & technical consultancy at St James’s Place

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