In the latest in a series of consultations on the simplification of the inheritance tax charges on trusts, HM Revenue & Customs has unveiled revised proposals for simplifying the calculation process for relevant property trusts and preventing the use of multiple nil-rate bands for trusts created by the same settlor. While more detail is required, the latest consultation document does provide useful insight into the way the charges are likely to be applied.
Over the next few articles I will consider how the new rules operate in practice but I would stress these interpretations are based on a consultation document only.
We do not have draft legislation yet and further changes may well be made following the consultation, which closes on 29 August. Draft legislation is expected in October to be incorporated into the next Finance Bill. However, as will be explained below, anti-forestalling provisions have been announced in relation to the amount of the nil rate band available to settlements established after 6 June 2014.
On that date, the Government published the third in a series of consultation documents on a proposed new regime for calculating the IHT charges on relevant property trusts. HMRC has previously consulted in this area, first publishing Inheritance Tax: Simplifying Charges On Trusts In July 2012 and then Inheritance Tax: Simplification Of Trust Charges – The Next Stage in May 2013.
While legislation on the alignment of payment and filing dates, and the treatment of retained (accumulated) income of a trust, was included in Finance Bill 2014, this latest consultation (Inheritance Tax: A Fairer Way of Calculating Trust Charges) sets out the much-anticipated proposals for calculating IHT trust charges and, in particular, the treatment of the nil-rate band where a settlor has made more than one settlement.
Under the current system, the calculation of relevant property trust IHT charges has been complicated with the risk that, in some cases, the cost of professional advice could frequently exceed the amount of the tax charge itself. It has been necessary to apply complex formulae to arrive at a hypothetical “effective rate” of tax taking account of historic values, including the settlor’s cumulative total in the seven years prior to setting up the trust to which the charge relates.
Simplification in this area was therefore welcomed, especially by the professions, but when the May 2013 consultation document was published it became clear that simplification would come at a cost. Under these proposals, while trustees would no longer need to concern themselves with matters such as “related property” and “cumulative totals”, the settlor’s nil-rate band would be split equally between all the trusts they had created – regardless of when they were created and the value of property they held.
Understandably, the proposals were criticised. In particular, concerns were raised about the fact that the proposals affected settlements established in the past when the principle of accessing multiple nil rate bands for settle-ments established, even by the same settlor, on different days, was perfectly acceptable based on legislation and the Court of Appeal decision in the Rysaffe case. Further concern was expressed over the requirement to apportion a (potentially significant) part of the nil-rate band to a trust under which there was no possibility of an IHT charge arising – at least during the settlor’s lifetime – assuming no further property was added to the trust.
Impact on charges
Similar considerations would apply to a discretionary trust of, say, a term assurance policy that could be of negligible value while the life assured was in good health, or a loan trusts with a significant loan outstanding. And as the level of the 10-yearly (periodic) charge has a significant impact on whether there will be an exit charge if the settled property exited the settlement in the 10 years following the periodic charge, the potential impact on charges on trusts that did have property with meaningful value in them could be significant.
There was also criticism of the proposed anti-fragmentation rules which would also have prevented the reuse of the nil-rate band even for settlements created more than seven years apart. In this regard while a transfer to a settlement by the settlor more than seven years after any other previous chargeable transfer had been made would fall within the settlor’s nil-rate band and thus avoid an entry charge, under the proposed anti-fragmentation rules there would be no re-available full nil rate band for the new settlement when determining the periodic and exit charges. This is a consequence of the need for a settlor to split a single nil-rate band among all of the settlements created by them during lifetime.
Having considered some of these criticisms, the latest consultation document sets out revised propo-sals that aim to satisfy many of these concerns but nonetheless achieve the same overall goal of simplification. I will look at the new consultation next week.
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