Back to basics: IHT
Prior to the Finance Act 2006 (FA2006), trust practitioners only needed to consider inheritance tax (IHT) returns on the creation and life of discretionary trusts and following the death of a life tenant.
Following FA2006 there are myriad trusts for IHT purposes, either within the relevant property regime or remaining outside the regime.
The principal change is that all lifetime trusts created post 21 March 2006 are immediately chargeable to IHT, irrespective of the type of trusts and are relevant property trusts. Accumulation and Maintenance trusts, created prior to 22 March 2006, were also brought into the relevant property regime, if they were not amended prior to 6 October 2008.
In summary the trusts that are currently within the relevant property regime are:
- Pre 22 March 2006 Accumulation and Maintenance settlements, unless they were amended, so that the beneficiaries become entitled to the capital on attaining the age of 18.
- Discretionary trusts of any date.
- Settlements created after 21 March 2006, during the lifetime of the settlor, regardless of the type of trust or trust terms.
- Settlor interest trusts are within the regime, even though they represent gift with reservations and do not reduce the value of the individuals’ estate. For example, Mr Bunting receives a large personal injury claim of GBP750,000 and wishes to self-settle to protect the capital during his lifetime, but this would trigger an immediate IHT charge.
- The three occasions of charge for relevant property trusts are:
- Creation of a trust or subsequent addition of funds (additions).
- Appointments and advancement of funds from a trust (exits).
- Ten-year anniversaries of the settlement (anniversary).
There are anti-avoidance provisions, so transactions undertaken that increase or decrease the value of the trust funds held, may be treated as additions or withdrawals (exits) for IHT purposes. It should also be noted that it is the original date of the settlement that determines the ten-year anniversaries, regardless of when the trust became a relevant property trust.
Trusts that remain outside the relevant property regime are:
- Pre 22 March 2006 interest in possession trusts. These may be Accumulation and Maintenance settlements in which the beneficiaries attained a right to income prior to 22 March 2006, or were varied prior to the 6 October 2008, entitling the beneficiaries to capital at 18. They may also include transitional serial interests, where new beneficiaries were appointed, prior to the 6 October 2008 in existing interest in possession trusts. Any additions to these trusts after 21 March 2006 will be treated as relevant property for tax purposes.
- Immediate post-death Interest in Possession trusts. To qualify the trust must be effected by will or intestacy, the life tenant must become entitled to the income on the death of the settlor and not be for bereaved minors or for a disabled interest.
- Disabled trusts – transfers into these trusts are potentially exempt transfers (PETs)
- Bereaved minor trusts. These can only arise on the death of a parent and be for the benefit of their minor children. The income can be accumulated or distributed at the discretion of the trustee, but the discretion cannot be exercised between one child and another, they each have their own share of trust funds. The child becomes entitled to the capital on attaining the age of 18.
Inheritance tax arises on the interest in possession trusts above, on the death of the beneficiary, as the trust funds would form part of their taxable estates.
The remaining type of trust is the 18-25 trust. This is something of a hybrid, as it is subject to IHT if the beneficiary becomes entitled to the capital after attaining the age of 18, but at a reduced rate. To qualify as an 18-25 trust, it must be created under the will or intestacy of a parent, the beneficiary must be under 25 and must become entitled to the capital before or on attaining the age of 25. If a beneficiary becomes entitled at the age of 25 the rate can be no higher than 4.2 per cent, as the trust property is only relevant property for seven years (from the beneficiary attaining the age of 18 to 25).
The return IHT 100, and relevant supplementary forms, should be completed within 12 months of the above chargeable occasions (forms detailed at hmrc.gov.uk/trusts/iht/iht100.htm). However, trusts are excepted if the values are within certain limits and if certain conditions are satisfied. Returns are generally not required for relevant property trusts, if the settlor is UK domiciled, there are UK resident trustees and no related settlements (settlements created on the same day) and the value of the notional aggregate chargeable transfer is less than 80 per cent of the nil rate band at the date of the anniversary, addition or exit (IHTM 06120-06130).
There are also exceptions for trusts outside the relevant property regime and these can be found in the HMRC’s Inheritance Tax Manual (06100 onwards).
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