In our April update, we described HMRC’s last attack on this. That attempt, made in the name of 'simplification', was defeated by a ‘wave of criticism from the profession’ that the changes were too complex.
HMRC has therefore tried again with a new consultation, this time in the name of 'fairness'. The consultation, titled Inheritance tax: a fairer way of calculating trust charges, was published on 6 June. The precise form of the proposed rules is still uncertain but commentators doubt that HMRC will allow any substantial deviation from the consultation proposals.
The explicit aim of the proposals is to ‘ensure that the equivalent of a full IHT charge is paid on settled property once in every generation (30 years)’ and to ‘provide a degree of parity with the charges on property held absolutely as it passes down the generations’.
Settlement nil rate bands (SNRBs)
The central provision is to give each settlor one 'settlement nil rate band' (SNRB) in addition to their individual nil rate band to be split between all the trusts. The settlor has a new duty to elect how to allocate their SNRB, though it will be possible to reallocate under certain circumstances, for example, if the trust is wound up in the settlor’s lifetime.
Only some settlements will be covered by the SNRB:
Settlements created on or after 7 June 2014
Settlements created before 7 June but where relevant property is created by the amendment of the terms of the settlement later
Settlements created before 7 June but which have funds added to it later. The added funds would be treated as a separate trust for tax purposes
Any other settlements will retain their individual NRBs.
In other words, HMRC intends it to be too late to make any last-minute additions.
Changes to ten-year anniversary and exit charges
Historically, HMRC has made the difficult calculations required for these charges. The intention is now to make trustees calculate the charges themselves.
To make this task more palatable, the proposals suggest removing the historical information that has made the calculations so complex. This would include details of the settlor’s chargeable transfers in the seven years before creating the trust, the initial value of non-relevant property contained in the trust, and the initial value of assets in related settlements.
Instead, there will be a flat rate of 6% for both anniversary and exit charges.
However, looking at the worked examples provided, it seems that the exit charges will be a little more complex, depending on whether any nil rate band was available at the time of the exit, before the first ten-year anniversary, or at the last anniversary, if after.
Different positions of trusts
Owing to anti-forestalling provisions, the new rules will affect trusts in completely different ways depending on when settlements were first created and funds last added.
Trusts which were both created and last had funds added before 7 June will continue to use their existing NRB. The new anniversary and exit charges can arise on or after 6 April 2015, ie so a trust created on 6 April 2005 will be subject to the new self-assessment regime immediately.
Trusts which were created before 7 June but had funds added afterwards will have the existing NRB for the 'old' and SNRB for the 'new' funds. However, the new charges will apply to both old and new funds on or after 6 April 2015. Advisors should be particularly alert to trusts which will have funds added inadvertently in the future, eg on the settlor’s death.
Trusts created after 7 June 2014 will only have their allocated share of the SNRB. However, the new anniversary charges will not arise until 2024, the earliest possible ten year anniversary.
Extension to 18-25 trusts
The consultation suggests the simplified charges regime be applied to 18-25 trusts also. It does not indicate whether they would also be included in the SNRB but HMRC has verbally confirmed to us that they would.
The closing date for responses is 29 August.