Taxation of Trusts:  HMRC consults for a third time

On 6th June HMRC published its third consultation  document over attempts to simplify IHT charges on  Trusts. This concentrates on the nil rate band (“NRB”)  available to the trustees of a settlement. 

As the rules currently stand it is possible to create a  series of trusts on successive days by settling assets  with a total value across all the trusts within the NRB. The  benefit of this approach becomes apparent at the first  10 year anniversary when each trust is treated as having  its own NRB for the purposes of the IHT calculation. The  result is that there is a far greater headroom for assets  increasing in value before an IHT charge arises (although  in truth this approach is quite unwieldy and the extra  costs need to be weighed carefully against the benefits).

The proposed rules allocate only one NRB to a settlor  that he or she must then “elect” to split between trusts  created after 6th June 2014. Trusts created before 6th  June will retain their NRB, but the proposals would apply  to property to them added after 6th June. 

The consultation document retains the proposal to apply  a flat charge of 6% to all 10 year anniversary or exit  charge calculations. 

The closing date for responses is 29th August 2014.

Capital Gains Tax:  Principal Private Residence Relief

The “final period exemption” for principal private  residence relief (“PPR”) has been reduced from 5 April  2014 from 36 months to 18 months. This relief allows  homeowners to claim PPR in full despite having moved  out prior to the sale. Previously, a person could not live  at a property for 3 years before sale and still claim the  relief in full, but now this period has been reduced to 18  months.

Employee Benefits: NICs Pitfalls

A recent Supreme Court decision has found that where  an employer makes a payment for an employee’s benefit  to, for example, a pension fund or insurance company,  National Insurance Contributions (“NIC”) should not usually  be charged. The key determining factor is whether the  payments are “earnings” - they won’t be if the employee  has no right to the payment itself but only to the benefit  procured by the payment. In that case NIC should not be  levied.

The Supreme Court suggested that earnings for NIC  purposes are more narrowly defined that “emoluments” for  income tax purposes. However, in many cases the rules  on disguised remuneration may well apply and bring the  payments within both the NIC and the income tax net in  any case.

Consultation on the use of Charities in tax avoidance

HMRC consulted earlier in the year on the use of charities  in tax avoidance schemes. HMRC has stated that it wishes  to target only “extreme cases of abuse”, and allow normal  charities and charitable giving to continue unaffected.

The draft legislation issued as part of the consultation is  aimed at preventing the establishment of charities where  securing a tax advantage is the main purposes, or one of  the main purposes of the establishment of that charity. If  this is found, HMRC would not recognise the charity for tax  purposes from the outset. It does not currently affect the  legislation regarding charitable giving. 

The proposals have proved controversial in the charities  world. Bodies such as STEP have suggested that  obtaining a tax advantage is part of the nature of charitable  status, and legislation should focus on the abuse of those  reliefs, and not on the establishment of charities per se.  HMRC’s proposals suggest that it would have the power  to refuse the registration of charities, leading to uncertainty  and possibly a deterrent to those seeking to establish  genuine charities. The results are due in the summer.