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Chilly reception for 'simplifications' of IHT charges on trusts

Thursday, 29 August, 2013

HMRC’s consultation on amending the periodic and exit charges on relevant property trusts, which ended last week, has attracted some criticism.

The key proposal is to split the inheritance tax nil-rate band (NRB) between all trusts set up by the settlor, instead of the current system under which each separate trust is entitled to a full NRB of its own. The amended rules would apply to both new and existing settlements from a given date.

This is clearly intended to counter the established tax planning practice of setting up multiple pilot trusts to maximise inheritance tax relief on the total assets settled over time.

However, according to the Institute of Chartered Accountants in England and Wales (ICAEW), this measure would make the periodic charging regime even more complex, rather than simplifying it, which was the ostensible purpose of HMRC's proposals.

The ICAEW's tax faculty points out that the proposed amendment does not include any de minimis provision, unlike the standard rate band for income tax and the annual exemption for capital gains tax. 'As trusts of negligible or nil value, such as life insurance trusts, will also be included, the proposals will result in higher and inequitable charges on trusts,’ it says. 'This is more of a revenue-raiser than a simplification'.

The proposals will simply replace one set of complex rules with another that are potentially even more onerous, says the ICAEW. 'We do not think that a one size fits all approach works in this scenario and think that there are grounds for having a simplified set of rules for small trusts and a more sophisticated set of rules for larger trusts.'

Ernst & Young, in its response to the consultation, said the proposed changes are unlikely to save trustees significant time and will lead to an increased tax charge in many cases.

'The new calculation should be available as an opt-in for trustees who wish to make use of it, or alternatively opt out and continue under the existing regime,’ said E&Y. 'As a minimum there should be some form of grandfathering to allow trusts to be wound up without wasting the nil rate band in the future'.

Another of HMRC's proposals is that undistributed income be treated as capital after two years. However, as ICAEW points out, many trusts are set up with the aim of providing help in the long term, and thus they accumulate income for a rainy day. 'To have an arbitrary cut-off of two years will put tax and trust law at loggerheads,’ it says, suggesting a 21-year cut-off period instead. Ernst & Young also criticised HMRC's proposals for accumulated income.

Legislation on the proposals is likely to be introduced in the 2014 Finance Bill.

Sources