Publication date: 6 June 2014
Closing date for comments: 29 August 2014
| Subject of this
consultation: |
Simplifying the calculation of
Inheritance Tax (IHT) charges on trusts at ten yearly intervals
or when assets are transferred out of the trust and making
fairer the way the nil-rate band is allocated as part of those
calculations. |
| Scope of this
consultation: |
This is the third consultation on
this subject. Draft legislation on the alignment of payment and
filing dates and the treatment of retained income is included
in Finance Bill 2014. This consultation focuses on changes to
the way IHT trust charges are calculated and it also sets out
proposals for the treatment of the nil-rate band where the
settlor makes a number of settlements. |
| Who should read this: |
The consultation will be of
interest to settlors and trustees and practitioners involved in
the administration of trusts. |
| Duration: |
6 June 2014 – 29 August
2014. |
| Lead official: |
Tony Zagara HM Revenue &
Customs. |
| How to respond or enquire about
this consultation: |
Responses or enquiries should be made:
|
| Additional ways to be
involved: |
HMRC is willing to meet with
interested parties to discuss this consultation. Please contact
the e-mail address above if you would like to arrange a
meeting. |
| After the
consultation: |
A summary of responses will be
published after the consultation. Draft legislation will be
published in the autumn. |
| Getting to this stage: |
HMRC has previously consulted in
this area: Inheritance Tax: Simplifying charges on trusts was
published in July 2012 and Inheritance Tax: Simplification of
trust charges – the next stage was published in May
2013. |
| Previous engagement: |
HMRC has held meetings with
representatives of professional bodies and with trustees and
practitioners. |
Contents
1. Introduction
2. Key areas of difficulty and HMRC's proposed solutions
3. The revised model
4. Tax impact assessment
5. Summary of Consultation Questions
6. The Consultation Process: How to Respond
1. Introduction
1.1 HMRC has previously published two consultation
documents1 setting out proposals on how the
inheritance tax (IHT) treatment of relevant property trust charges
could be simplified. Two of those proposals relating to retained
income and the alignment of filing and payment dates are included in
Finance Bill 2014 at Schedule 21. This further consultation focuses
on simplifying the trust charge calculations for relevant property
trusts and how the nil-rate band should be applied to such
charges.
1 Inheritance Tax: Simplifying charges on
trusts – published 13 July 2102 Inheritance Tax: Simplifying
charges on trusts – the next stage – published on 31
May 2013.
1.2 HMRC's policy aim is to achieve simplification and reform
without jeopardising Exchequer revenue and to reduce unnecessary
complexity and administrative burdens for trustees and practitioners
where it is feasible to do so.
1.3 Most property settled on trust after 2006 is known as
"relevant property". Trusts that include relevant property
pay (IHT) on transfers ("exits") of such property out of
the trust and on the trust's ten year anniversaries.
1.4 Property in the following types of trust doesn't count as
relevant property:
- interest in possession trusts with assets that were settled
before 22 March 2006;
- an immediate post-death interest trust;
- a transitional serial interest trust;
- a disabled person's interest trust;
- a trust for a bereaved minor; and
- an age 18 to 25 trust.
1.5 It is widely acknowledged that the calculations for ten year
anniversary and exit charges for relevant property trusts can be
complex and time consuming and HMRC recognises that the professional
costs to prepare the calculations can be out of proportion to the
amount of IHT due.
1.6 At present there are a number of factors that may need to be
taken into account when calculating relevant property trust charges,
including:
- The chargeable transfers made by the settlor within the seven
years before the date of the settlement.
- The value of the settled property immediately after the
settlement commenced.
- The length of time for which each item of the settled property
has been comprised in the settlement at the date of the charge (if
less than ten years).
- The value of property which has left the settlement since the
last ten-year charge.
- The prevailing rates of IHT at the date of the charge, the
value of the property in the trust, and the amount of any reliefs
available such as Agricultural or Business Property Relief.
- In some cases it may be necessary to take into account the
historical value of property in related settlements made on the
same day as the settlement subject to the IHT charge and the value
of any other property in the settlement that is, for one reason or
another, not chargeable to IHT.
1.7 Trustees and practitioners broadly support proposals that
allow historical data in connection with previous lifetime transfers,
related settlements and non relevant property to be ignored. The
advantage being a reduction in administrative burdens in that
trustees would only be required to know about transfers of property
out of the trust and other trusts in the last ten years rather than
having to be aware or find out about such events before that
time.
1.8 However, simply removing the need to make adjustments that
take those earlier events into consideration could lead to increased
fragmentation of property across a number of settlements resulting in
significant loss to the Exchequer. A third of the respondents to the
July 2012 consultation suggested that the risk of fragmentation might
be addressed by changing the way that the nil-rate band is applied
when raising trust charges. This could also ensure fairness in the
system as it would no longer be advantageous for a settlor to create
multiple settlements.
1.9 The Government wants to ensure that there is consistency of
treatment between those individuals who transfer their assets on
death and those individuals who make lifetime transfers through the
use of trusts. In the circumstances we believe that it is right that
there should be one nil-rate band available for those individuals
settling property into trust just as there is only one nil-rate band
available to an individual transferring assets on death.
1.10 HMRC recognises the concerns expressed by trustees and
practitioners about the impact such a change would have and in
particular the practical difficulties associated with gathering
information about other trusts involving different trustees and where
the settlor is no longer alive. Many respondents to the May 2013
consultation commented that HMRC would be replacing one set of
complexities with another and the additional record keeping
requirements would mean an increase in administration burdens for
practitioners and trustees alike rather than a reduction.
1.11 In the light of those responses, HMRC has looked critically
at the approach outlined in the consultation and explored other ways
in which the policy objective can best be achieved. This consultation
sets out an alternative model for applying the nil-rate band in
conjunction with a simplified method of calculating the ten-year and
exit charges. It is split into several chapters:
- Chapter 2 summarises the original proposals set out in the May
2013 consultation for simplifying the calculation of the trust
charges and applying the nil-rate band. It highlights the key
problem areas identified in the responses and outlines HMRC's
revised proposals for applying the nil-rate band.
- Chapter 3 sets out in detail how the revised model would work
and considers the scope for simplification around IHT charges
arising on 18 – 25 trusts.
- Chapter 4 sets out the summary of impacts in the Tax Impact
Assessment.
- Chapter 5 lists the consultation questions.
- Chapter 6 provides information about the consultation process
and how to respond to it.
2. Key areas of difficulty and HMRC's proposed solutions
2.1 This chapter briefly summarises the existing rules. It then
sets out stakeholders' main concerns with the proposals featured
in the May 2013 consultation, HMRC's response to those concerns
and an outline of the new proposals for allocating the nil-rate
band.
Summary of the existing rules
2.2 Inheritance tax is charged at 40 per cent on the value of a
deceased person's estate in excess of the nil-rate band
threshold, currently £325,000. If an individual transfers assets
into a trust those assets no longer form part of their estate, so
would not be subject to inheritance tax when they die. To avoid a
loss of tax, where the value of assets transferred to a trust exceeds
£325,000 the excess is subject to an inheritance tax "entry
charge" at a rate of 20 per cent. In addition, charges are also
due at each ten-yearly anniversary of when the assets were put into
the trust (the "periodic charge"), and an "exit
charge" is payable when assets are taken out of the trust. The
combination of the entry charge, ten-yearly anniversary charges and
exit charge is roughly equivalent to imposing a 40 per cent
inheritance tax charge once a generation.
2.3 Under the existing rules, the nil-rate band available to a
trust is reduced to take account of other settlements made by the
settlor on the same day and of any other transactions by the settlor
which may have affected the settlor's IHT position. These
adjustments are intended to reduce the scope for settlors to
artificially reduce the IHT charges to which the trust assets would
otherwise be liable through the use of multiple trusts each with its
own unrestricted nil-rate band.
2.4 The current anti-fragmentation rule fails to prevent the risk
of settlors fragmenting ownership of property across a number of
different settlements. For example it is possible to side-step the
rule by setting up multiple trusts on consecutive days each of which
has the benefit of its own nil-rate band.
Periodic Charges
2.5 A periodic charge is due on every tenth anniversary of the
date on which property was first added to the trust if, broadly:
- the trust contains relevant property, and
- the value of the relevant property contained in the trust is
greater than the IHT nil-rate band available to the trust.
2.6 The IHT nil-rate band is reduced to take account of other
chargeable transfers made by the settlor at or before the time the
trust was set up. These adjustments are intended to reduce the scope
for settlors to artificially reduce the IHT charges to which the
trust assets would otherwise be liable.
2.7 Before trustees can begin to calculate the amount of any
periodic charge they need to establish:
- the historic value (i.e. the value at the time of settlement)
of any property in any other trusts (except wholly charitable
trusts) that the settlor set up on the same date as the trust
concerned; and
- the historic value of any chargeable transfers that the settlor
made in the seven years before this trust was set up.
2.8 The calculation of the periodic charge is further complicated
by the need to take account of assets that have not been relevant
property for the full ten years preceding the charge and of assets
that are not themselves relevant property but which are held in the
trust. So trustees also need to establish:
- the current value of the relevant property in the trust;
- the value and dates of any transfers of relevant property out
of the trust during the preceding ten years;
- the current value and dates of any additions of relevant
property to the trust during the last preceding ten years; and
- the historic value of trust property that has not been relevant
property at any time.
Exit Charges
2.9 Exit charges are imposed on transactions or events that take
place before the first ten-year anniversary of a trust, or between
such anniversaries, to ensure that IHT cannot be avoided where
relevant property ceases to be relevant property in advance of a
periodic charge being imposed. An exit charge is a proportionate
periodic charge with time-apportionment being calculated on a
quarterly basis.
2.10 There are various reasons why relevant property may cease to
be relevant property. It may occur when:
- a trust comes to an end;
- assets within the trust are distributed to beneficiaries;
- a beneficiary becomes absolutely entitled to enjoy an
asset;
- an asset ceases to be "relevant property" (for
example by becoming part of a charitable trust or a trust for a
qualifying disabled person); and
- where the trustees enter into a non-commercial transaction that
reduces the value of the trust.
2.11 As with the periodic charge, the calculation requires
trustees to ascertain certain information. If the exit charge arises
before the first periodic charge, trustees need to ascertain:
- the historic value (at time of settlement) of trust
assets;
- the historic value (at time of settlement) of any property in
any other trusts (except wholly charitable trusts) that the settlor
set up on the same date as the trust; and
- the historic value of any transfers subject to IHT (whether
into trusts or not) that the settlor made in the seven years before
this trust was set up.
2.12 If the exit charge arises after the first periodic charge,
trustees need to establish
- the value of relevant property at the date of the periodic
charge;
- the historic value (at time of settlement) of any property in
any other trusts (except wholly charitable trusts) that the settlor
set up on the same date as the trust;
- the historic value of any transfers subject to IHT (whether
into trusts or not) that the settlor made in the seven years before
this trust was set up; and
- the value of any additions at the time the addition became
relevant property.
Summary of the original proposals
2.13 HMRC proposed that the settlor's previous lifetime
transfers should be ignored in determining the available nil-rate
band for the purposes of calculating the hypothetical transfer on
exit charges and ten year anniversary charges. This would avoid the
problems and associated costs of having to obtain historic records
and valuations.
2.14 Non-relevant property and property in related settlements
would also be ignored for the purposes of the calculation of ten-year
and exit charges as this relies on establishing the initial value and
obtaining historical records. The advantage of these modifications
would be that trustees would only be required to know information
regarding exits from the trust and other trusts in the last ten years
rather than potentially very old information.
2.15 HMRC proposed that a simple rate of 6% of the chargeable
transfer should be used in the calculation of ten-year and exit
charges, rather than the lengthy calculations to determine the
effective rate and settlement rate.
2.16 To alleviate the risk that settlors might seek to fragment
ownership of property across a number of trusts to maximise the
availability of reliefs or exempt amounts, it was proposed that the
nil-rate band should be split by the number of relevant property
settlements created by the same settlor.
2.17 In order to arrive at the most equitable solution and to
prevent settlors from rearranging their affairs to avoid the charge,
the splitting of the nil-rate band would not be limited to
settlements existing at the time the trust concerned was created or
the settlements existing at the time of the charge. Therefore:
- For the first ten year charge the nil-rate band would be split
between all relevant property settlements made by the settlor and
in existence at any time between the date the trust concerned was
set up and the time of the charge. This would include any
settlements which had been wound up before the date of charge.
- For subsequent ten year charges the nil-rate band would be
split between all relevant property settlements made by the settlor
and in existence at any time between the date of the previous ten
year anniversary and the date of the current charge.
- For exits before the ten year anniversary, it was proposed that
the nil-rate band should be split between all relevant property
settlements in existence at any time during the period the trust
concerned commenced to the date of exit.
- For exits after the ten year anniversary, the nil-rate band
would be split between all relevant property settlements taken into
account for the purposes of calculating the IHT charge at the last
ten year anniversary plus any in existence since the ten year
anniversary to the date of exit.
2.18 The proposals would apply to all existing settlements from
the date the new legislation was implemented and to any new trusts
created thereafter.
Areas of concern
Information gathering
2.19 Stakeholders raised concerns with the proposal to split the
nil-rate band. They argued that it would require the trustees of each
settlement, at every chargeable occasion, to ascertain the number of
relevant property settlements in existence during (broadly) the
previous ten years. Two difficulties were identified: First, the
information gathering exercise, rather than being conducted once
only, would need to be conducted more frequently, with obvious time
and cost consequences. Secondly, it would be very difficult for any
set of trustees to know with certainty how many other trusts may have
been created by the settlor or in existence during the appropriate
period. Respondents pointed out that there may be different sets of
trustees, the settlor may have died, lost capacity or otherwise be
inaccessible. Consequently, they doubted whether any trustee,
properly advised, could in future sign an IHT return, given the lack
of certainty over its accuracy.
HMRC response
2.20 HMRC acknowledges the concerns raised and as a result we have
developed an alternative model for applying the nil-rate band which
shifts the administrative burden away from trustees and on to the
settlor. The new rules would mean that each settlor is entitled to a
"settlement" nil-rate band (SNRB) which is separate from
and unconnected with their own personal nil-rate band. They will
decide how their SNRB is to be allocated between the settlements they
create and be responsible for providing that information to trustees.
SNRB will be the same as and will change in line with the IHT
nil-rate band. The revised model is explained in more detail in
chapter 3.
Existing trusts
2.21 Stakeholders objected to the tax treatment of existing trusts
being overturned in such a way as to bring many formerly non
reportable and non chargeable settlements into charge. Many
stakeholders felt that the proposed division of the nil-rate band
unfairly penalises sensible and moderate estate planning which up
until now has been acceptable to HMRC. Respondents said that it would
be unfair to retrospectively impose charges on arrangements put in
place with due regard to HMRC rules and settled legal principles.
HMRC response
2.22 HMRC is aware that many trusts have been created for
legitimate purposes based on current rules. We also recognise that
some smaller trusts would be brought into charge if rules allocating
the nil-rate band were applied to these trusts. In view of this, the
new rules would apply only to:
- new settlements made after 6 June 2014;2
- additions of property/funds to existing trusts made after 6
June 2014; or
- where changes made after 6 June 2014 to existing settlements
result in relevant property coming into being, for example where an
interest in possession settlement created before 22 March 2006
amends the terms of its trusts to become a relevant property
trust.
2 Anti forestalling provision – see
paragraphs 2.37 – 2.38
The rate of tax charged
2.23 Stakeholders pointed out that the introduction of a standard
6% charge in the way proposed would involve a double charge on exits
in the previous ten years.
HMRC response
2.24 Under the current regime the nil-rate band is reduced by the
amount of any distributions but this reduction is used only as part
of the calculation of the "settlement rate" – there
is no double charge because the ten-year charge is only on the amount
that remains relevant property on the ten year anniversary. There is
no proposal to change this approach. HMRC is still of the view that a
simple rate of 6% of the chargeable transfer should be used in the
calculation of ten-year and exit charges.
Self assessment of charges
2.25 Stakeholders felt that given that trustees are personally
liable for the tax, it was unacceptable for HMRC to require trustees
to self-assess in complex areas such as this unless comprehensive and
efficient online calculators are provided.
HMRC response
2.26 By removing the need for historical data much of the
complexity is taken out of the calculations and we believe a
requirement on trustees to "self assess" the tax due
supported by toolkits and further guidance, would not be too
burdensome and is consistent with the requirements HMRC places on
other taxpayers.
Renewable nil-rate band
2.27 Many stakeholders expressed the view that if HMRC was
concerned about the use of "pilot" trusts, the nil-rate
band could be split between relevant property settlements made by the
settlor and in existence at any time between the date the first trust
commenced and the seven year anniversary of that date. Any trusts
established more than seven years apart would be discounted. Many
respondents saw this option as a way of ensuring an equivalent
treatment for individuals who give their property away and
individuals settling property into trust.
HMRC response
2.28 HMRC does not see this as a viable option mainly because the
same practical issues would arise in terms of trustees' and
practitioners' administration burdens as they would still be
required to gather information about all the settlor's
settlements and keep necessary records (albeit over a shorter
period). Furthermore, whilst HMRC accepts that wherever possible
there should be parity of treatment between property held absolutely
and settled property, it is not a principle that can be applied in
all circumstances. The questions that need to be considered therefore
relate to how best to achieve the aim fairly, reasonably and without
creating opportunities for avoidance.
2.29 The charges imposed on property entering and leaving
discretionary trusts are intended as a means of providing a degree of
parity with the charges on property held absolutely as it passes down
the generations. In our view the comparison between individuals
giving property away and settlors putting assets into trust is not a
fair reflection of this aim. The broad aim of the relevant property
trust charges is to ensure the equivalent of a full IHT charge is
paid on property once in every generation (30 years). Individuals who
make outright gifts of their property have no say in what happens to
it as it is distributed back into the wider economy or in the hands
of others. In contrast, property settled in discretionary trusts can
be left undistributed for up to 125 years so where property continues
to remain undistributed, the maximum charge after the initial 30 year
generation would be 6% every ten years.
2.30 To illustrate the point further, under current rules, a
couple aged 40 could transfer property into a separate discretionary
trust every seven years (£3.25 million by age 75 assuming the
nil-rate band remains at £325,000) saving £1.3 million in
IHT. In this scenario the next generation avoids any IHT charges
altogether because of the previous generation's use of multiple
nil-rate bands.
Division of the nil-rate band
2.31 A key point made by respondents to the May 2013 consultation
was that simple division of the nil-rate band would be unacceptable.
They suggested that the settlor should be able to make an election to
apportion the nil-rate band on a pro- rata basis to account for the
level of funds held in each trust or in accordance with the market
value of the relevant trusts at the time of the relevant event.
HMRC response
2.32 HMRC has considered this principle further and we agree that
when considering how the nil-rate band should be divided between
settlements created by the same settlor, he or she should be given
the flexibility in the method of allocation to prevent wasting any
unused nil-rate band.
New Proposals
2.33 We propose a revised model for applying a nil-rate band
available to relevant property trusts based on a statutory
requirement that the settlor must make an election that sets out how
they wish their "settlement nil-rate band"(SNRB) to be
allocated between the settlements they have made. The election would
enable the settlor to specify, in percentage terms, but subject to
certain conditions, how much of their SNRB should be allocated to
each trust. The responsibility for deciding how their SNRB should be
allocated and for notifying the trustees would rest entirely with the
settlor who would also be responsible for ensuring that they did not
allocate more than a single nil-rate band. Over-allocation would
result in sanctions against the settlor and the recovery of any tax
underpaid. But there would also be sanctions against the trustees if
it was established that the SNRB allocated by the settlor had been
overstated or over-claimed by the trustees as a result of their
careless or deliberate actions.
2.34 The revised proposal shifts the administrative burden away
from trustees and provides them with the certainty they need when
calculating trust charges. If the settlor fails to inform the
trustees of the amount of SNRB to be allocated to a settlement by the
time an event gives rise to a tax charge, the trustees would be
obliged to calculate any IHT due on the basis that no SNRB is
available.
2.35 Given that the fundamental premise of the revised model is
that the responsibility for determining how the SNRB is allocated
lies with the settlor, it follows logically that any new rules would
apply only to new settlements or additions to existing settlements
etc. Existing settlements (settlements made on or before 6 June 2014)
would retain the nil-rate band available to them under the current
rules but would also benefit from the simplified calculation method
using the standard rate of 6%.
2.36 By simplifying the regime, HMRC would require trustees to
"self assess" the tax due. Changes would be made to the IHT
100 form to accommodate this with a "tax due" box at the
end of the return. Responsibility to enter the amount due would rest
entirely with the trustee. The requirement for trustees to self
calculate would be supported by toolkits and further guidance.
2.37 HMRC recognises that the public consultation on these
proposals will highlight the advantage that will accrue to existing
settlements and may encourage the creation of new settlements in the
run up to change. Settlors could see this as a window of opportunity
to take advantage of the current rules and maximise the amount of
nil-rate band to set against funds settled into trust as they seek to
benefit from both the current legislation and a new SNRB under these
proposals. This would defeat, to a large extent, our policy objective
of having only one nil-rate band available for property held in
trust.
2.38 Consequently the Government considers it necessary to make an
anti-forestalling provision. So, the new legislation will only have
effect in respect of the calculation of IHT charges from 6 April 2015
but it will apply to ,
- new settlements made after 6 June 2014;
- additions of property/funds to existing trusts made after 6
June 2014; or
- where changes made after 6 June 2014 to existing settlements
result in relevant property coming into being such as an interest
in possession settlement created before 22 March 2006 which amends
the terms of its trusts to become a relevant property trust.
This means that the settlor will need to allocate their new SNRB
to such settlements on or after 6 April 2015 so that future relevant
property charges can be calculated correctly. For the avoidance of
doubt, any tax charges arising before 6 April 2015 but in respect of
settlements or additions etc made after 6 June 2014 will be
calculated in accordance with the current rules.
2.39 The following chapter sets out in more detail how the revised
model would work.
3. The revised model
3.1 The revised model for applying a nil-rate band available to
trusts is based on a statutory obligation on settlors requiring them
to make an election that sets out how they wish their SNRB to be
allocated between the settlements they have made.
The Election to allocate nil-rate band to a settlement
- The election would be made in writing by the settlor on a form
prescribed by HMRC before any SNRB can be allocated to a
settlement.
- It would specify how much SNRB is allocated to each settlement
in percentage terms so that any future increase (or reduction) in
the IHT nil-rate band will automatically feed through.
- The form would be signed and dated by the settlor and it would
be the settlor's responsibility to provide a copy to the
trustees showing the amount of SNRB allocated to the trust, so that
the trustees can accurately calculate IHT due for periodic or exit
charges. By signing the form the settlor is declaring that the SNRB
percentage allocated to the settlement is within the maximum
allowable.
- The date on which the election is made can be flexible. It can
be made when a new settlement is made or at any time up to the due
date for payment of the first charge. However, it is envisaged that
most settlors are likely to make an election and an allocation of
the SNRB when the trust is set up.
- The allocation of the SNRB to a settlement can be amended or
withdrawn until the point of the payment date for the first charge.
But once the allocated SNRB has been used in the calculation of an
exit or ten year anniversary charge, the allocation of the SNRB to
that trust cannot be reduced.
- If property is subsequently added to the trust, a further
election can be made provided the settlor has SNRB available. So
even in cases where a trust may have already incurred a first
charge, the percentage of SNRB can be increased (if available to
the settlor) when additional funds/property are transferred into
that trust. Settlors would also be able to allocate any available
SNRB against additions of property into existing trusts (trusts
created on or before 6 June 2014).
- Trustees would need to be able to provide evidence to HMRC of
the amount of SNRB allocated to them. Keeping a copy of the
election would meet this requirement.
- If no election is made to allocate SNRB to the trust, then the
trustees must calculate the charge on the basis that none is
available.
- If the settlor should die, the personal representatives would
have two years to make an election to either allocate SNRB to
settlements created by Will or to make sure that the deceased's
SNRB has been fully allocated between settlements made during their
lifetime and on death.
- If HMRC later discovered that too much SNRB had been claimed by
the personal representatives, the claim would be reduced in the
chronological order of the elections made.
- Penalties may be in point against a settlor, and in certain
circumstances, against trustees, who over-claimed the SNRB.
3.2 The following examples give an indication of how the revised
model may work in practice. For convenience, the examples assume the
IHT nil-rate band remains at £325,000 throughout.
Example 1:
First ten year anniversary (TYA)
charge
Trust 1 settled in 2016 (Mr Smith), who allocated 50% of his SNRB
to the settlement.
| Value of settled property in
2026 |
£500,000 |
| Less allocated SNRB (50%) |
£162,500 |
| Value subject to tax |
£337,500 |
| Charge at 6% |
£20,250 |
| Settlement rate
(20,250/500,000) |
4.05% |
Example 2:
Exit charge after ten year
anniversary
3.3 The effective rate of an exit charge after a TYA is based on
the rate that applied at the most recent TYA and adjusted for the
number of quarters that have elapsed since that TYA. It would also
reflect any changes in the nil-rate band since the TYA as set out in
the existing legislation. Any additions of relevant property to the
trust fund between the TYA and an exit charge would be taken into
account as an addition to the value of the relevant property and the
settlement rate recalculated to establish the rate to be applied to
the exit charge.
The trustees decide to pay £50,000 to one of the
beneficiaries of Mr Smith's settlement 5 years after the ten year
anniversary
| Value of relevant property at date
of TYA |
£500,000 |
| Exit of £50,000 5 years after
ten year anniversary |
£50,000 |
| Settlement rate from ten year
anniversary |
4.05% |
| Charge on exit (£50,000 x
4.05%) x 20/40 |
£1,012.50 |
3.4 The next two examples cover the situations where Mr Smith adds
property/funds to the trust and where he chooses to allocate further
SNRB that is available to him; and show the effect that this would
have on the exit charge.
Example 2A
The trustees decide to pay another £50,000 to one of the
beneficiaries of Mr Smith's settlement in 2031, 5 years after
first ten year anniversary. £100,000 was added to the settlement
in 2028.
| Value of relevant property at date
of first TYA |
£500,000 |
|
| Addition to relevant property |
£100,000 |
£600,000 |
| Less allocated SNRB (50%) |
|
£162,500 |
| Value subject to tax |
|
£437,500 |
| Charge at 6% |
|
£26,250 |
| Settlement rate
(26,250/600,000) |
|
4.375% |
| Charge on exit (50,000 x 4.375%) x
20/40 |
|
£1,093.75 |
Example 2B
The trustees decide to pay another £50,000 to one of the
beneficiaries of Mr Smith's settlement in 2031, 5 years after
first ten year anniversary. £100,000 was added to the settlement
in 2028 and Mr Smith increased the SNRB allocated to this settlement
to 75%
| Value of relevant property |
£500,000 |
|
| Addition to relevant property |
£100,000 |
£600,000 |
| Less allocated SNRB (75%) |
|
£243,750 |
| Value subject to tax |
|
£356,250 |
| Charge at 6% |
|
£21,375 |
| Settlement rate
(21,375/600,000) |
|
3.562% |
| Charge on exit (50,000 x 3.562%) x
20/40 |
|
£890.50 |
Example 3:
Exit charges in the first ten years
3.5 Exit charges within the first ten years of a trust being set
up would be calculated based on the settlement rate and then adjusted
for the number of quarters the property was in the trust. The
settlement rate3 would be calculated at three
tenths of the effective rate of tax on a hypothetical chargeable
transfer. The hypothetical transfer is made up of the total of the
historic value of the property comprised in the settlement
immediately after it commenced and the value (at the date of
addition) of any added property. The SNRB allocated by the settlor to
the trust is deducted from this figure.
3 The calculation is based on 3/10 of the
lifetime rate of inheritance tax (half death rates), currently 20%.
So the maximum rate is 6% (as for TYA charges).
Trust 2 settled in 2017 (Mrs Smith), who allocated 50% of her SNRB
to the settlement. She added £100,000 to the settlement in 2018
and the trustees decide to pay £50,000 to one of the
beneficiaries of Mrs Smith's settlement in 2022, 5 years after
the date of settlement
| Value of relevant property at
date of settlement |
£750,000 |
|
| Additions of relevant property
(2018) |
£100,000 |
£850,000 |
| Less allocated SNRB 50% |
|
£162,500 |
| Value subject to tax |
|
£687,500 |
| Charge at 6% |
|
£41,250 |
| Settlement rate
(41,250/850,000) |
|
4.853% |
| Charge on exit (£50,000 x
4.853% x 20/40) |
|
£1,213.25 |
3.6 The following examples show how the exit charge for trust 2
would be calculated where further SNRB is allocated to the settlement
and the effect of further exits on the ten year anniversary
charge.
Example 3A
Mrs Smith increased the SNRB allocated to the settlement at the
time of the addition in 2018 and the trustees decide to pay
£50,000 to one of the beneficiaries of Mrs Smith's
settlement after 5 years.
| Value of relevant property at date
of settlement (2017) |
£750,000 |
|
| Additions of relevant property
(2018) |
£100,000 |
£850,000 |
| Less allocated SNRB 75% |
|
£243,750 |
| Value subject to tax |
|
£606,250 |
| Charge at 6% |
|
£36,375 |
| Settlement rate
(36,375/850,000) |
|
4.279% |
| Charge on exit (£50,000 x
4.279% x 20/40) |
|
£1,069.75 |
Example 3B
The trustees decide to pay £200,000 to another beneficiary of
Mrs Smith's settlement after 7 years
| Charge on exit 200,000 x 4.279 x
28/40 |
|
£5,990.60 |
3.7 If by the time of the ten year charge, the whole of the SNRB
allocated to the trust has been consumed by exits from the trust, the
ten year charge would be calculated on the basis that there is no
SNRB available and the tax would be calculated on a straight 6% of
the value of the relevant property.
Example 4
Ten year anniversary charge (trust
2)
Trust 2 settled in 2017 by Mrs Smith
| Value of settled property at TYA
in 2027 |
|
£600,000 |
| Less allocated SNRB (75%) |
£243,750 |
|
| Less exit charges |
£250,000 |
£0 |
| Value subject to tax |
|
£600,000 |
| Charge at 6% |
|
£36,000 |
| Settlement rate (36,000/600,000) x
100 |
|
6% |
| Charge on original funds 500,000 x
6% |
|
£30,000 |
| Charge on funds added in 2018
100,000 x 6% x 36/40 |
|
£5,400 |
Ten year anniversary at year 20
3.8 Continuing with the example above, if there were no further
exits between year 10 and year 20, there will, as now, be nothing to
deduct from the SNRB allocated to Mrs Smith's trust (in this case
75%) at the time of the next ten year charge so the full amount of
SNRB will be available again to set against the charge at year 20.
Because the SNRB is allocated in percentage terms and is linked to
the IHT nil-rate band, the restored SNRB would also take into account
any increases in the nil-rate band.
In summary
- The calculations remain broadly similar to what happens now but
remove the historical baggage from the calculation.
- Under the new system – related settlement & excluded
property drops out.
- We will stick with the current position of using 40ths.
- Trustees would "self assess" the amount of IHT
payable in respect of ten year anniversary and exit charges.
- HMRC will continue to provide agents support through guidance
and on-line tool kits to help them work out figures and tax
due.
Additions to existing settlements under the new rules
3.9 From 7 June 2014 any new funds added to trusts in existence at
that date would be treated as a separate fund within the settlement.
For the purposes of calculating ten-year and exit charges HMRC would
work from the original settlement commencement date and apply the
40ths rule for the length of time the new funds had been
relevant property as that is how the process currently operates.
3.10 Even though the settlor may have created settlement(s) before
the new rules come into force, each settlor will have a new SNRB to
allocate to funds settled after 6 June 2014. The settlor can allocate
more SNRB, if there is any available, where additions are made to
trusts created after the new legislation is in force, or additions
that are treated as a separate fund are made. They have the
flexibility of withdrawing the SNRB allocated to that settlement
provided a charge has not yet arisen.
3.11 If a person settles property on relevant property trusts
already established by another, this would be treated as two separate
settlements and two separate settlors as now. The second settlor
would be entitled to their own SNRB provided it was clear that it was
their own property that was being settled. So they too would have to
make an election for an allocation of SNRB against the settlement of
property they have settled on the trust originally established by the
first settlor.
Death of the settlor
3.12 The death of a settlor may give rise to a number of issues to
be considered to ensure that the best use is made of their SNRB.
3.13 If the settlor had made no relevant property settlements
during their lifetime, but had included a relevant property
settlement in their Will, their personal representatives would be
able to allocate a full SNRB to the settlement(s) made by Will. They
would have two years to make those allocation(s).
3.14 If, however, the settlor had allocated all their SNRB to
relevant property settlements made after 6 June 2014, there would be
none to allocate to any such settlements made by Will.
3.15 If the settlor had made a number of settlements during their
lifetime, but had not allocated any SNRB or had only partially
allocated SNRB, the personal representatives would be able to make
that allocation on behalf of the settlor, which would include
allocating any balance of SNRB to settlements made by Will.
3.16 Other types of trusts will not be affected as they are not
relevant property trusts. Nor will this affect any flat rate charges
that apply.
Q1 Are there any other provisions that
would need to made for when a settlor dies that have not been covered
in this section?
Trusts that are wound up
3.17 If a settlement is wound up and money paid out absolutely,
that will incur an exit charge and the funds will be in the
beneficiaries' hands. Should the beneficiaries resettle that
property themselves, there would be an entry charge and the
beneficiary would be able to allocate part of their SNRB to their
settlement. Since any one settlor is entitled to have £325,000
set against the total property that they have settled; it would be
reasonable for the original settlor to be able to re-allocate the
SNRB that has become available as a result of the settlement being
wound up, to other settlements that they have made.
3.18 However, we don't want to create a situation where
winding up a trust and reallocating SNRB creates a favourable
position which, if it were not for the additional SNRB, would be
subject to a charge. Therefore the re-allocation can only be done if
the whole of the trust is wound up. Once it has been wound up there
is no problem with re-allocating the available SNRB to any other
trust (new or in respect of an addition to an existing
settlement).
3.19 If the settlor has died and the trustees wind up a trust, the
SNRB allocated to that trust cannot be reallocated to another trust
created by the same settlor. The SNRB allocated to the trust that is
wound up is lost as the settlor has died.
Transfers between existing settlements under the new regime
3.20 Any transfers between existing settlements will be subject to
s81 IHTA 1984 and will be treated as still remaining comprised in the
first settlement and the rules appropriate to that first settlement
will continue to apply to funds concerned.
Change of trust purpose/beneficiaries under the new rules
3.21 Relevant property trusts to interest in possession.
There is no change here from the current rules. The settled property
has remained relevant property, so the SNRB allocated to the
settlement should remain allocated to it, subject to the rules about
reallocation if no charge has arisen.
3.22 Relevant property trusts to charitable trusts. There
is no exit charge on property ceasing to be relevant property and
becoming held for charitable purposes and there is no charge on a
charitable trust. No SNRB would be needed against the settlement. If
the change to charitable status is permanent this is effectively the
same as winding up a relevant property trust and therefore in these
circumstances, the SNRB can be re-allocated.
3.23 Vulnerable beneficiary trusts: These trusts should not
be affected by this measure. Similar to a charitable trust, if a
relevant property trust has effectively been ended because the
vulnerable beneficiary is deemed to have a qualifying interest in the
possession, the SNRB can be re-allocated to another relevant property
trust. But it would mean that if the vulnerable beneficiary dies
there would be no automatic return to the SNRB for any remaining
residual beneficiaries. The settlor would need to make a choice about
whether to reallocate that part of their SNRB if the settlement
ceased to be a relevant property settlement.
The nil-rate band for existing trusts
3.24 Under the current rules the nil-rate band available to a
settlement upon creation is adjusted to take into account any
previous lifetime chargeable transactions. If there were no such
transactions in the previous 7 years the trust would have the benefit
of a full nil-rate band upon its creation. Any transfers out of the
trust would affect the calculation of the periodic charge and reduce
the nil-rate band accordingly. The nil-rate band is restored to the
original amount when the settlement commenced if there are no further
transfers out of the trust between ten year anniversaries.
3.25 The following example illustrates the impact that retaining
the nil-rate band and the changes summarised at paragraph 3.8, will
have on existing trusts.
Example 5
Mr Jones created two relevant property trusts on 1 February 2008,
settling £300,000 in each. He had made no lifetime chargeable
transfers in the previous 7 years. The trustees of trust No.1 made
payments to beneficiaries in February 2012 of £100,000 and in
February 2016 of £50,000.
| Exit charge in February 2012 |
|
|
| Historic value of relevant
property |
£300,000 |
|
| Historic value of related
settlement |
£300,000 |
|
| Assumed transfer |
|
£600,000 |
| Less Nil-rate band |
|
£325,000 |
| Value to determine rate of
tax |
|
£275,000 |
| Tax at 20% |
|
£55,000 |
| Effective rate of tax
(55,000/600,000) x 100 |
|
9.167% |
| Reduced to 3/10ths |
|
2.75% |
| Charge on exit (£100,000 x
2.75% x 16/40) |
|
£1,100 |
| Exit in February 2016 |
|
|
| Historic value of relevant
property |
|
£300,000 |
| Less Nil-rate band |
|
£325,000 |
| Value subject to tax |
|
Nil |
(Without the changes proposed, the exit charge in 2016 would have
been £50,000 x 2.75% x 32/40 = £1,100).
Ten year anniversary charge
| Value of relevant property at 1
February 2018 |
|
£200,000 |
| Less Nil-rate band |
£325,000 |
|
| Less exit charges |
£150,000 |
£175,000 |
| Value subject to tax |
|
£25,000 |
| Charge at 6% |
|
£1,500 |
| Settlement rate (1500/200,000) x
100 |
|
.75% |
(Without the changes proposed, the ten year charge in 2018 would
have been
| Value of relevant property |
£200,000 |
|
| Historic value of related
property |
£300,000 |
|
| Assumed transfer |
|
£500,000 |
| Less Nil-rate band |
£325,000 |
|
| Less exit charges |
£150,000 |
£175,000 |
| Value subject to tax |
|
£325,000 |
| Tax at 20% |
|
£65,000 |
| Effective rate of tax (65,000 x
500,000) x 100 |
|
13% |
| Reduced to 3/10ths |
|
3.9% |
| Charge on ten year anniversary
(200,000 x 3.9%) |
|
£7,800 |
3.26 If any distributions were made between the first ten year
anniversary and the next ten year anniversary these would also be
charged using the settlement rate of 0.75%, adjusted to account for
any increases in the nil-rate band, and the value of the exits in
that period would reduce the nil-rate band available at the time of
the second ten year anniversary.
3.27 However, if there were no further transfers between ten year
anniversaries, the value of the nil-rate band at the second ten year
anniversary would be restored to the value when the trust was first
created, adjusted for any increases in the nil-rate band. Using the
above example, this would be £325,000.
3.28 If an existing trust has a nil-rate band available in the sum
£75,000 on creation of the trust and the IHT threshold increases
to, say, £500,000, the trust's new nil-rate band will be
£250,000. When an existing trust is wound up, the nil-rate band
available to it is lost.
3.29 From 6 April 2015 all settlors will have the benefit of a
full SNRB to allocate for any new settlements regardless of how many
existing trusts they have and the nil-rate band(s) that those trusts
have to take forward under the new rules.
3.30 SNRB will only be available to individuals; relevant property
settlements created by a company will no longer be entitled to a
nil-rate band and, subject to relief for periods when the settled
property is not relevant property, tax will be charged at the full 6%
rate.
3.31 Companies cannot make a transfer of value and as a result the
value of the nil-rate band is never reduced to account for the
settlor's previous lifetime cumulative transfers, so each
settlement created by a company gets the full nil-rate band, no
matter how many settlements the company makes. It would not make
sense to allow this to continue as it would not only run contra to
the proposed new rules but would also open up the opportunity for
manipulation and avoidance.
Q2 Are there any other features of the
existing rules that should be retained under the new rules?
Q3 Are there any aspects of the proposed
new rules for allocating the SNRB or calculating the IHT charges that
could be improved?
Q4 Are there any aspects of the existing
rules that would no longer be necessary under the new rules?
Q5 Are there any other impacts for
example on cost or equality that should be taken into account?
Scope for further simplification
3.32 In conducting this review and through its analysis of
previous consultation responses, HMRC has identified one other area
where simplification might be useful.
Age 18-to-25 trusts
3.33 Finance Act 2006 introduced a new category of "age 18 -
25 trusts". A trust of this kind can generally only be set up
under:
- the Will (or intestacy) of a deceased parent, including where
this is deemed to have happened – for example, following a
Deed of Variation that satisfies the conditions set out in the IHT
legislation;
- the Criminal Injuries Compensation Scheme.
3.34 However it was possible for some Accumulation &
Maintenance trusts created before 22 March 2006 to be amended to fall
within these provisions.
3.35 On or before attaining the age of 25, the person must become
absolutely entitled to the settled property, any income arising from
it, and any income that has arisen from the property and been
accumulated before that time.
3.36 If the provisions are satisfied then no charge to tax arises
where:
- the beneficiary becomes absolutely entitled to any of the
settled property on or before their 18th birthday, or
- any property is applied for the maintenance of the beneficiary
before they turn 18, or
- the bereaved minor dies before they turn 18.
3.37 However, a charge to tax will arise where:
- provisions set out in the IHT legislation cease to apply to the
settled property where the beneficiary becomes absolutely entitled
to it between 18 and 25, or
- the beneficiary dies over 18 but under 25. Also, a charge to
tax will arise in all other circumstances where the relevant
provisions set out in the legislation cease to apply to any settled
property.
3.38 The calculations of IHT due in these circumstances presently
mirror the rules for relevant property trusts. For example the
legislation refers to a settlement rate calculated by reference to a
postulated chargeable transfer, involving the settlor's previous
chargeable transfers, related settlements, historic values etc. There
does not seem to be any good reason why the method for calculating
tax for 18-25 trusts should not be reformed in the same way and at
the same time as the changes proposed for the relevant property trust
rules.
Q6 Should the simplified method for
calculating ten year and exit charges proposed for relevant property
trusts be extended to trusts that fall within the charging provisions
for 18-25 trusts?
4. Tax Impact Assessment
Summary of Impacts
| Exchequer impact (£m) |
2014-15 |
2015-16 |
2016-17 |
2017-18 |
2018-19 |
| |
Negligible |
Negligible |
Negligible |
Negligible |
Negligible |
| |
This measure is expected to have a
negligible impact on the Exchequer up to 2018-19. |
| Economic impact |
The measure is not expected to have
any significant economic impacts |
| Impact on individuals and
households |
The measure will impact on
individuals settling funds into trusts. Individuals will in
future have a single nil-rate band that can be allocated to
trusts they create during the course of their lifetime. Once
100% of the IHT nil-rate band has been allocated any trusts
created subsequently will incur IHT periodic and exit charges
without the benefit of any nil-rate band deduction. |
| Equalities impacts |
The people affected by this measure
will be in those groups which are represented in more wealthy
populations. The Government has no evidence to suggest that the
measure will have any adverse equalities impacts. |
| Impact on businesses and Civil Society
Organisations |
Trust businesses may see a
reduction in administration burdens as a result of settlors
having to elect for how they want the nil-rate band allocated
to each trust they set up.
The reform of the multiple trusts rule could increase the
number of trusts liable to ten-yearly or exit charges. The
numbers of trusts currently needing to undertake a ten-yearly
charge calculation each year is around 1000. A more detailed
evaluation of the impact of these changes will be informed by
this further consultation. |
| Impact on HMRC or other public sector
delivery organisations |
Simplification will result in some
efficiencies for HMRC in undertaking and checking trustees'
calculations, but these will not be significant. Settlors'
allocation of the nil-rate band would need to be monitored but
this would form part of routine risk assessment activity. |
| Other impacts |
The measure will benefit small
businesses (firms with fewer than 20 employees) as a result of
the reduction in complexity and administration burdens. The
measure will have no impact on wider areas such as privacy,
carbon assessment, health impact assessment, rural proofing or
other environmental issues. The impacts on sustainable social
and economic development are negligible. |
5. Summary of Consultation Questions
Q1 Are there any other provisions that
would need to made for when a settlor dies that have not been covered
in this section?
Q2 Are there any other features of the
existing rules that should be retained under the new rules?
Q3 Are there any aspects of the proposed
new rules for allocating the SNRB or calculating the IHT charges that
could be improved?
Q4 Are there any aspects of the existing
rules that would no longer be necessary under the new rules?
Q5 Are there any other impacts for
example on cost or equality that should be taken into account?
Q6 Should the simplified method for
calculating ten year and exit charges proposed for relevant property
trusts be extended to trusts that fall within the relevant charging
provisions for 18-25 trusts?
6. The Consultation Process
This consultation is being conducted in line with the Tax
Consultation Framework. There are 5 stages to tax policy
development:
Stage 1 Setting out objectives and identifying options.
Stage 2 Determining the best option and developing a framework
for
implementation including detailed policy design.
Stage 3 Drafting legislation to effect the proposed change.
Stage 4 Implementing and monitoring the change.
Stage 5 Reviewing and evaluating the change.
This consultation is taking place during stage 2 of the process.
The purpose of the consultation is to seek views on the detailed
policy design and a framework for implementation of a specific
proposal, rather than to seek views on alternative proposals.
How to respond
A summary of the questions in this consultation is included at
chapter 5.
Responses should be sent by 29 August 2014, by e-mail to ihtandtrustsconsult.car@hmrc.gsi.gov.uk
or by post to: Tony Zagara HM Revenue & Customs, Room G48/49, 100
Parliament Street, London SW1A 2BQ
Telephone enquiries: Tony Zagara 03000 585265 (from a text phone
prefix this number with 18001)
Paper copies of this document or copies in Welsh and alternative
formats (large print, audio and Braille) may be obtained free of
charge from the above address. This document can also be accessed
from HMRC Inside Government. All responses will be
acknowledged, but it will not be possible to give substantive replies
to individual representations.
When responding please say if you are a business, individual or
representative body. In the case of representative bodies please
provide information on the number and nature of people you
represent.
Confidentiality
Information provided in response to this consultation, including
personal information, may be published or disclosed in accordance
with the access to information regimes. These are primarily the
Freedom of Information Act 2000 (FOIA), the Data Protection Act 1998
(DPA) and the Environmental Information Regulations 2004.
If you want the information that you provide to be treated as
confidential, please be aware that, under the FOIA, there is a
statutory Code of Practice with which public authorities must comply
and which deals with, amongst other things, obligations of
confidence. In view of this it would be helpful if you could explain
to us why you regard the information you have provided as
confidential. If we receive a request for disclosure of the
information we will take full account of your explanation, but we
cannot give an assurance that confidentially can be maintained in all
circumstances. An automatic confidentiality disclaimer generated by
your IT system will not, of itself, be regarded as binding on HM
Revenue and Customs (HMRC).
HMRC will process your personal data in accordance with the DPA
and in the majority of circumstances this will mean that your
personal data will not be disclosed to third parties.
Consultation Principles
This consultation is being run in accordance with the
Government's Consultation Principles.
The Consultation Principles are available on the Cabinet Office
website: www.cabinetoffice.gov.uk/resource-library/consultation-principles-guidance
If you have any comments or complaints about the consultation
process please contact:
Oliver Toop, Consultation Coordinator, Budget Team, HM Revenue
& Customs, 100 Parliament Street, London, SW1A 2BQ.
Email: hmrc-consultation.co-ordinator@hmrc.gsi.gov.uk
Please do not send responses to the consultation to this
address.