Northampton Accountants Harris & Co report that next month’s Autumn Statement could see a clampdown by HMRC on the use of multiple trust schemes as a means of reducing IHT charges, with the introduction of a single nil-rate band (NRB) across all trusts, rather than a separate NRB for each individual trust as at present.
The proposals are outlined in an HMRC consultation, Inheritance Tax: Simplifying Charges on Trusts – the next stage, which closed in August. But it is thought likely new rules will be announced in either the Autumn Statement or the 2014 Finance Bill.
Julie Clift, tax writer at Wolters Kluwer, pointed out that the measure would be retrospective, applying to trusts already in existence, as well as those set up in the future.
‘There is currently a benefit from the use of multiple trusts because if they are not created on the same day they are not related settlements for IHT purposes. The proposal will split the nil-rate band between all relevant property settlements so that the 6% charge will apply to the total amount of assets held across all trusts above the threshold. This is not really a simplification but a revenue raising measure which will result in many trusts facing higher IHT charges.’
According to the Daily Telegraph the chancellor is likely to introduce this change in the Autumn Statement on 5 December.
HMRC has yet to publish details of the feedback it received but earlier indicated in the consultation paper that it was considering splitting the NRB between the number of settlements created by the settlor. It also wants to introduce a flat rate 6% tax on the periodic charges and the exit charges levied on trusts, and to change the rules on taxing any income which accumulates in a trust .
HMRC said in the consultation document:
‘People currently benefit from the use of multiple trusts because if they are not created on the same day they are not related settlements for inheritance tax purposes. Under a more simplified regime our proposal is to split the nil-rate band between all relevant property settlements.’
Gary Heynes, partner and head of the private client practice at Baker Tilly, said that HMRC is seeking to make fundamental changes to how IHT is applied which will see more trusts brought into the tax system, which will increase revenues.
The move to introduce a flat rate of 6% on trusts at the 10-year anniversary or on exiting a trust was an example of simplification, Heynes said, but warned that plans to align IHT filing dates with self-assessment filing dates risked adding to the administrative burden for individuals and tax advisers at a busy time of the year and are ‘unnecessary’.
Currently around 1500 trusts file IHT returns each year, according to HMRC figures , but as there is no central register of trusts it is not known how many will need to do so once the regime is changed.
Heynes was also critical of HMRC proposals to tax income accumulated in a trust as capital after two years, compared to the current position when income is treated as capital if has not been distributed after 10 years.
‘Every trust is different and there could be good reasons to continue to accumulate income for longer than two years – for example in situations where the trust beneficiaries are young people who will be using the money for university. Two years is too short a period and we need bespoke solutions as to when income turns into capital, rather than legislation.’