Inheritance Tax: Trust simplification

Inheritance Tax: Trust simplification

In the Budget 2012 the Chancellor announced measures that the Government believed would ‘simplify the Inheritance Tax regime for relevant property trusts and reduce compliance costs for trustees and practitioners’.

An initial consultation document outlining the proposed changes was published in July 2012 and a further more detailed consultation document setting out options for simplification was subsequently issued in May 2013. The second consultation document identified three main areas for simplification or possible change, as follows:

  • simplifying the Inheritance Tax calculations
  • standardising the treatment of income that may be accumulated
  • aligning filing and payment dates

On 10 December 2013 the Government issued a Summary of Responses to their May 2013 consultation document and published draft clauses which will now be incorporated into the Finance Bill 2014 as follows:

1 Standardising the treatment of income that may be accumulated

In the May 2013 consultation document HMRC proposed a standard approach for dealing with income that may be accumulated.  Broadly, this deemed income to be accumulated and added to capital for the purposes of the ten year and exit charge calculations, if it remained undistributed two years after the tax year in which it arose, ie income received on 31 May 2009 and not distributed would be deemed to be capital from 6 April 2012.

However, following responses to the consultation, the Government have revised their standard approach and in Finance Bill 2014 treat income that remained undistributed for more than five years at the date of the ten year anniversary as if it was capital for the purposes of the ten year charge only. This change will affect ten year charges on or after 6 April 2014.

It should be noted that tax will be charged at the full ten year charge rate on any such undistributed income caught by these new provisions to, as HMRC put it, “avoid the need for trustees to keep very detailed records”. They also confirm that the undistributed income retains its nature as income and is only treated as capital for the purposes of the ten year charge calculation, so it may still be paid out of the trust as income and would not be subject to an exit charge.

Trustees, in consultation with their advisors, will need to consider their distribution policy carefully in light of this change; especially if a ten year anniversary charge is imminent.

2 Aligning the filing and payment dates

Finance Bill 2014 also contains legislation to align the filing dates for Inheritance Tax trust charges.  For tax charges of relevant property trusts arising on or after 6 April 2014 the IHT account filing date and payment date is six months after the end of the month in which the event occurred.

These changes will generally half the time limit for delivering an account which, in most cases, is currently 12 months from the end of the month in which the transfer occurred and will also bring forward the payment date for chargeable events between 6 April and 30 September by between 1 and 6 months.

Simplification of trust charges

In light of concerns raised by respondents to the Government’s plan to split a single Inheritance Tax nil rate band by the number of relevant property settlements which the settlor has made, the Government will consult further on alternative proposals to split the nil rate band and simplify the trust charges. Please see new rules for mutiple trusts article here.

If you consider that this will impact upon you, further advice should be taken before the anticipated introduction of the changes from 6 April 2015.