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.