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HMRC airs Plan B for splitting IHT nil-rate band across trusts

Monday, 9 June, 2014

HMRC has amended its proposal to split an individual's inheritance tax (IHT) nil-rate band (NRB) across all trusts he or she sets up.

The proposal emerged last year as part of an alleged attempt to simplify the periodic and exit charges on relevant property trusts. Instead of the current system, under which each of a settlor's trusts is entitled to a full NRB of its own, the NRB would be shared between all trusts set up by the settlor. It would apply to both new and existing settlements from a given date.

The proposal was intended to counter the established tax planning practice of setting up multiple pilot trusts to maximise inheritance tax (IHT) relief on the total assets settled over time – the so-called Rysaffe strategy.

However, the proposal received much public criticism, not least that it would become impossible for trustees to complete the necessary returns, especially after the settlor had died or lost capacity.

In the end the provision did not make it through to Finance Bill 2014. Now HMRC has published a new consultation paper, accepting some of the criticisms and putting forward an alternative method of achieving the same goal.

Its new idea is to give each settlor a ‘settlement NRB’ as well as the standard personal NRB. Settlors who create multiple trusts would have to make a statutory declaration to their trustees, stating how the extra NRB is to be allocated among all their trusts. This declaration would give the trustees the information they need to calculate the periodic and final IHT charges, says HMRC.

The settlement NRB will be the same as the IHT nil-rate band and will change in line with it. Settlors will be responsible for ensuring that they do not allocate more than a single nil-rate band to all their trusts, and will be penalised if they do. However sanctions will also be imposed on trustees who carelessly or deliberately allowed the settlor to over-allocate his NRB.

Another criticism of HMRC's original plan was that it could act retrospectively on existing trusts. To counter this, the new legislation will only have effect in respect of the calculation of IHT charges from 6 April 2015. However, HMRC is worried that the publication of its new proposals will tempt potential settlors into a last flurry of trust-making to forestall the provisions. So it wants the new regime to apply to new settlements or additions of property or funds to existing trusts made after 6 June 2014; or where changes made after 6 June 2014 to existing settlements result in their conversion into a relevant property trust. This means that settlors will have to allocate their new nil-rate bands to settlements on or after 6 April 2015, so that future relevant property charges can be calculated correctly.