Posted by James Pearson on 18 Jun 2014

Inheritance Tax on Trusts to Increase

On 6 June 2014, HMRC released proposals for changes to the way Inheritance Tax (IHT) on settlements (trusts) is calculated, which could significantly increase the IHT payable.

In an effort to stop trusts from being established specifically to beat the new legislation, the changes will apply to any trust established after 6 June 2014 and any property added to trusts after that date, even though the changes are not intended to have effect until 6 April 2015.

All individuals are entitled to a nil rate band (currently £325,000) before IHT is chargeable.  At present, where individuals give away property to trusts during their lifetime, the nil rate band applicable to the trust is only reduced by transfers in the 7 years prior to that date.  This means that it would be possible for an individual to settle on trust property up to the value of the nil rate band every seven years with no IHT being payable.

The new proposals would limit each individual to one special ‘settlement nil rate band’ that would last for their lifetime.  Individuals would then be required to specify, by means of election, how their settlement nil rate band should be divided between any trusts they establish. If no election is made for a trust then no nil rate band will be applied to it.

Nil Rate Band for Inheritance Tax

This restriction of the nil rate band is likely to result in more new trusts falling within the scope of IHT, which is charged on each 10-year anniversary of the establishment of the trust and when assets are distributed from the trust.

In addition to this, corporate settlors will not have a settlement nil rate band, therefore any employment related trusts that cease to benefit from the IHT exemptions will fall completely to tax under these new rules.

The consultation also proposes a new flat rate of 6% for IHT on trusts. This is intended to simplify the calculation of IHT charges and would replace the current unwieldy method that requires information concerning the assets in the trust and transfers prior to the establishment of the trust to be held for long periods of time.

At the same time, HMRC is intending to change the reporting of IHT on trusts so that the trustees are required to ‘self-assess’ their IHT calculation on the ten-year and exit charges.

Despite these proposals, planning with trusts is still very tax efficient (particularly for business owners looking to pass wealth to other generations or for paying for grandchildren’s school fees etc.). Additionally, if the assets added to a trust are covered by other exemptions, then changes to the nil rate band will not affect the tax charged to the trust.

Contact Tax Innovations

Tax Innovations can advise you on how these proposed changes would affect you.

If you would like any advice regarding the above article or would simply like to discuss other ways in which we could help you or your business, please contact us on 01962 856 990 or customerservice@taxinnovations.com.