On good form - Small trusts and reporting requirements
Mr Goodie has taken inheritance tax (IHT) planning advice and has set up, on consecutive days, two small trusts, each with a cash sum of GBP10. Trust 1 is intended to hold his death-in-service benefit and he intends to assign to trust 2 a life assurance policy that he is taking out on his life in the next couple of weeks, paying a single premium of GBP20,000. He has made no substantial lifetime gifts but has used his annual exemption from IHT of GBP3,000 for the current and previous years.
Mr Goodie’s two trusts are typical ‘pilot’ trusts, which are created with a nominal sum to have the trusts up and running with a view to adding assets at a later date, either during lifetime or on death. Mr Goodie has been talking to a friend who recently created a trust for his grandchildren and he knows that a transfer into a trust is a chargeable lifetime transfer for IHT purposes. His friend had to report his trust to HMRC on a form IHT100 and Mr Goodie would like to know whether his trusts need to be reported.
In fact, Mr Goodie does not have to report these pilot trusts. On creating a trust, form IHT100 only needs to be delivered to HMRC where both (a) a chargeable lifetime transfer is made and (b) certain thresholds are exceeded. If the limits are not exceeded, the transfers will qualify as ‘excepted transfers’ within regulations introduced in 2008.1
Gift of cash, quoted shares or securities: ‘the small cash/quoted shares test’
- Where only cash, quoted shares or securities are gifted and the value of the gift, together with the transferor’s chargeable transfers in the previous seven years, is less than the nil rate band for the tax year in which the transfer is made (currently GBP325,000), the disposal qualifies as an excepted transfer.
Gift of other property: ‘the 80 per cent test’
- Where property other than (or as well as) cash, quoted shares or securities is gifted, the disposal must meet two tests to be an excepted transfer:
- The value transferred by the chargeable transfer, together with all the transferor’s chargeable transfers in the previous seven years, must not exceed 80 per cent of the nil rate band in the relevant tax year.The actual value transferred (i.e. all the value transferred, if more than the value of the chargeable transfer itself) must not exceed the nil rate band available at the time of the disposal.
The purpose of the second test is to require an IHT100 to be delivered where the value transferred includes property qualifying for agricultural property relief or business property relief from IHT, which reduces the chargeable transfer below the 80 per cent limit, but the actual value transferred (including the value of the relievable property) exceeds the 80 per cent threshold.
‘Pilot trusts are created with a nominal sum with a view to adding assets at a later date‘
Looking at Mr Goodie’s two new trusts:
- Trust 1 holds only GBP10 until his death, when the death-in-service benefit will be added. At that point an IHT100 should be completed.
- Trust 2 will also, at least initially, satisfy the small cash/shares test as there will only be GBP10 in the trust fund. However, on the assignment of the life policy to trust 2, the transfer is of the benefit of the life policy, and is not a transfer of cash, quoted shares or securities. It will therefore need to satisfy the 80 per cent test. The value transferred by Mr Goodie in the case of a life policy is the premium paid of GBP20,000.2
Trust 1 and trust 2 are those in which there is no qualifying interest in possession and are therefore within the relevant property regime, with IHT charges on property leaving the trusts and at each ten-year anniversary.
Fortunately, there are also regulations that relieve the need to submit an account for small ‘excepted settlements’ at the ten-year anniversary and on property leaving the trust.3 If Mr Goodie is still alive in 2022, ten years after creating the trusts, there will be no need to file an IHT100. Again, there are certain conditions set out in the regulations.4 His death will trigger the requirement to deliver accounts for trust 1, which will receive the death-in-service benefit, and for trust 2, which will receive the proceeds of the life policy.
The 2008 regulations for excepted transfers and excepted settlements took effect from 6 April 2007 and were introduced in response to the changes to the IHT treatment of trusts, brought in by Finance Act 2006. These changes extended the categories of trusts that fall within the relevant property regime and the potential charges on creation, every ten years and on property leaving the trusts. The aim of the regulations was to reduce significantly the number of accounts that would otherwise need to be delivered where there is no IHT to pay and little or no compliance risk.
- 1. Inheritance Tax (Delivery of Accounts) (Excepted Transfers and Excepted Terminations) Regulations 2008.
- 2. The transfer of a life policy’s value is the higher of the premium paid and the surrender value. In Mr Goodie’s case, we assume that the premium paid is the higher value.
- 3. Details in the Inheritance Tax (Delivery of Accounts) (Excepted Settlements) Regulations 2008.
- 4. Strictly, the notional aggregate chargeable transfer (including the value of any related settlements) should not exceed 80 per cent of the available nil rate band, but as Mr Goodie has made no previous lifetime gifts that affect his available nil rate band, and there are no related settlements, the full nil rate band is available. There is also a limit of GBP1,000 if only cash is held in the trust fund.
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