HMRC has previously published two consultation documents setting out proposals on how the IHT treatment of relevant property trust charges could be simplified. This further consultation (open until 29 August 2014) focuses on simplifying the trust charge calculations for relevant property trusts and on the way the nil-rate band should be applied to such charges. The new legislation would affect the calculation of IHT charges from 6 April 2015, but would also apply to new settlements and certain additions to existing trusts after 6 June 2014.
The purpose of the changes is to allow historical data in connection with previous lifetime transfers, related settlements and non-relevant property to be ignored – as this should reduce the administrative burdens for trustees.
However, HMRC is concerned that removing the need to make adjustments that take those earlier events into consideration could lead to the increased fragmentation of property across a number of settlements, resulting in significant loss to the exchequer. The risk of fragmentation could be addressed by changing the way the nil-rate band is applied when raising trust charges. In response to concerns expressed during previous consultations, the current consultation proposes a revised model for applying a nil-rate band available to relevant property trusts, based on a statutory requirement that the settlor must make an election that sets out how they wish their ‘settlement nil-rate band’ (SNRB) to be allocated between the settlements they have made. The election would enable the settlor to specify in percentage terms, but subject to certain conditions, how much of their SNRB should be allocated to each trust.
The revised proposal shifts the administrative burden away from trustees. If the settlor fails to inform the trustees of the amount of SNRB to be allocated to a settlement by the time an event gives rise to a tax charge, the trustees will calculate any IHT due on the basis that no SNRB is available.
Carolyn Steppler, partner at EY, said: ‘All individuals are entitled to a nil-rate band before IHT is chargeable. At present, where individuals give away property to trusts during their lifetime, that nil-rate band refreshes every seven years. This means that an individual could effectively set up a trust up to the value of the nil-rate band every seven years and there would be no IHT payable by the trustees.
'However, the new proposals would give each individual one special “settlement nil-rate band” that would last for their lifetime. Individuals would then specify, by means of election, how that nil-rate band should be divided between any trusts they establish. This will result in considerably more new trusts falling into the inheritance tax net, increasing the total inheritance tax payable by trustees.’
HMRC has previously published two consultation documents setting out proposals on how the IHT treatment of relevant property trust charges could be simplified. This further consultation (open until 29 August 2014) focuses on simplifying the trust charge calculations for relevant property trusts and on the way the nil-rate band should be applied to such charges. The new legislation would affect the calculation of IHT charges from 6 April 2015, but would also apply to new settlements and certain additions to existing trusts after 6 June 2014.
The purpose of the changes is to allow historical data in connection with previous lifetime transfers, related settlements and non-relevant property to be ignored – as this should reduce the administrative burdens for trustees.
However, HMRC is concerned that removing the need to make adjustments that take those earlier events into consideration could lead to the increased fragmentation of property across a number of settlements, resulting in significant loss to the exchequer. The risk of fragmentation could be addressed by changing the way the nil-rate band is applied when raising trust charges. In response to concerns expressed during previous consultations, the current consultation proposes a revised model for applying a nil-rate band available to relevant property trusts, based on a statutory requirement that the settlor must make an election that sets out how they wish their ‘settlement nil-rate band’ (SNRB) to be allocated between the settlements they have made. The election would enable the settlor to specify in percentage terms, but subject to certain conditions, how much of their SNRB should be allocated to each trust.
The revised proposal shifts the administrative burden away from trustees. If the settlor fails to inform the trustees of the amount of SNRB to be allocated to a settlement by the time an event gives rise to a tax charge, the trustees will calculate any IHT due on the basis that no SNRB is available.
Carolyn Steppler, partner at EY, said: ‘All individuals are entitled to a nil-rate band before IHT is chargeable. At present, where individuals give away property to trusts during their lifetime, that nil-rate band refreshes every seven years. This means that an individual could effectively set up a trust up to the value of the nil-rate band every seven years and there would be no IHT payable by the trustees.
'However, the new proposals would give each individual one special “settlement nil-rate band” that would last for their lifetime. Individuals would then specify, by means of election, how that nil-rate band should be divided between any trusts they establish. This will result in considerably more new trusts falling into the inheritance tax net, increasing the total inheritance tax payable by trustees.’
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