The proposals could also penalise those individuals who have taken very sensible and moderate IHT planning strategies by placing life polices in trust or setting up pension death benefit trusts
On 31 May 2013 HM Revenue and Customs released a consultation document proposing changes to the way in which trusts are subject to inheritance tax (IHT).
The proposals are aimed at simplifying the IHT charges on trusts. The current legislation is complex but, in essence, IHT is payable every ten years as long as the trust exists (known as a periodic charge), or when assets are distributed (known as an exit charge). Despite the government declaring the aim is to provide a simpler service, new proposals raise a number of problems and may amount to nothing more than a sophisticated move to garner more revenue through inheritance tax payments.
The consultation document contains a number of suggested amendments to the way in which inheritance tax payments will be calculated and it’s important that if you are a trustee, or have created a trust, that you’re familiar with the proposals – and if you aren’t comfortable with them, there is still time to have your say.
The most significant proposal is an amendment to the way in which the nil rate band (NRB) is applied. The NRB is a value on which no inheritance tax is payable, currently frozen at £325,000. This band covers estates of both individuals and, importantly, trustees. This proposal will be of a particular interest to those who have established multiple trusts.
At present when calculating the periodic charge trustees are entitled to claim an NRB and inheritance tax does not arise if the assets are £325,000 and under. In order to maximise this NRB availability, some settlors currently settle their funds across a number of trusts, all established on different days. Under the existing rules further amounts can be added either during lifetime, through a will or from an undrawn pension and each trust would be entitled to its own full NRB ‘allowance’. By diluting funds and assets among a number of trusts, the periodic charge is kept to the bare minimum.
Controversially, the consultation document proposes that the NRB is allocated across all trusts set up by the same settlor, meaning one band of £325,000 spread across them all, which is likely to seriously expose trustees and settlors to a much bigger IHT bill.
The proposals could also penalise those individuals who have taken very sensible and moderate IHT planning strategies by placing life polices in trust or setting up pension death benefit trusts. Such trusts have little value until after death but will still be considered within the one NRB umbrella of £325,000. This will significantly affect individuals who during lifetime want to plan to limit their exposure to inheritance tax.
At present, it is proposed that the new rules will apply to all trusts in existence from a set date. There is no indication at present the date from which the new rules will apply but it could be as early as April or July 2014.
While any simplification to the trust IHT regime is welcome, these proposals will undoubtedly cause problems and complexity that they are apparently devised to avoid. For instance, trustees must self assess their IHT liability and may not know what other trusts a particular settlor has set up, has set up and closed, or may set up in the future.
Costs for administering a trust will undoubtedly increase as the trustees will need to keep themselves informed of what is a continuously changing picture.
It would be fairer if these proposals only applied to new trusts and did not affect the moderate and unaggressive tax planning that clients are rightly able to set to ease their exposure to IHT.
If you are considering the setting up of a trust, or are a current trustee or settlor the best thing to do is seek professional and specialist legal advice as to potential next steps. Remember, the consultation is still open to receive opinions and viewpoints on the issue so you can still have your say.
At present it feels like the current proposals risk amending a complex but workable system with another complex system in which the only benefit is to raise more tax revenue for HMRC. If increasing the inheritance tax receipts is the aim there are other ways to achieve this; but of course that might involve more publicity to what would undoubtedly be a very unpopular proposal!
Paul Horton is an associate at national law firm Weightmans LLP