Views are sought on simplifying the calculation of inheritance tax (IHT) charges on trusts at ten-yearly intervals or when assets are transferred out of the trust, and making fairer the way the nil-rate band is allocated as part of those calculations. A consultation from HMRC focuses on changes to the way IHT trust charges are calculated and sets out proposals for the treatment of the nil-rate band where the settlor makes a number of settlements. Comments are requested by 29 August 2014.
What is being proposed?
This consultation follows previous consultations in 2012 and 2013 on simplifying the calculation of IHT charges on trusts which comprise relevant property for IHT purposes. These proposals, which would apply for charges arising after 5 April 2015, aim to reduce both the complexity of the calculations and the level of information that trustees need to collate and report to HMRC.
The key new idea is the concept of a settlement nil-rate band (SNRB) to be shared between all trusts created by the same settlor which become relevant property trusts after 6 June 2014. The settlor would be able to choose how to allocate his SNRB between the various trusts. The SNRB would have the same value as an individual’s IHT nil-rate band, currently £325,000.
How significant would the changes be?
The basic framework for calculating the IHT charge itself remains unchanged, but the new proposals will affect the way in which the rate of tax is calculated.
The idea that a settlor can choose how to allocate his SNRB is an interesting development. Although trusts created by the same settlor currently share capital gains tax and income tax annual allowances, this is simply an equal division between the trusts up to a maximum of five trusts, so there is a minimum allowance for each trust.
Of more significance, perhaps, is the impact on IHT planning for settlors. At present, with careful planning, a settlor can over a period of years set up multiple trusts, each with their own full nil-rate band. This would no longer be possible as the trusts would have to share an SNRB.
Are these desirable developments?
These proposals have their attractions in so far as they simplify the method of calculating the IHT charges, although if adopted the detail of the legislation will require careful scrutiny. It is, however, essential that HMRC develops appropriate forms and guidance for reporting the IHT charges. The existing forms are not suitable for the wide variety of circumstances that need to be reported and further changes to the rules will only compound the difficulties.
The proposals are less attractive when considering family asset protection more generally. Trusts have long been used as a mechanism of protecting family wealth from the ‘too much too young syndrome’, family breakdown and other problems and these changes may discourage their use. There are limited alternatives available.
What are the practical issues?
The changes to the IHT treatment of trusts introduced by FA 2006 significantly increased the number of trusts to which the relevant property regime applies.
Many trusts which had not previously been expected to fall into the regime were affected and the historic data required to calculate the IHT charges was either difficult to collate or not available.
On the face of it, these proposals will help to address some of the difficulties in calculating the rate of tax to be applied, but other complexities of the regime remain and different rules will apply for trusts in existence before 6 June 2014. Clients and their advisers will still need to juggle different sets of rules, with the rules applying to a particular case determined by the terms of the trust and the dates on which particular events occur.
The suggestion in some sections of the media that these changes could drive the elderly overseas is probably an exaggeration, but further changes to the IHT regime for trusts are likely to make their use less attractive, leaving clients even more uncertain as to how best to provide for their families.
The consultation closes on 29 August 2014, so comments on the specific questions raised or the proposals more generally should be submitted to HMRC before then.
Final thoughts?
These changes, again under the guise of simplification, are another example of a piecemeal approach to tax legislation. There have been suggestions of a wider review of inheritance tax, but there have been no consultations on this so far.
Interviewed by Jenny Rayner for LexisNexis UK legal news analysis.
