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Third Time Lucky for HMRC? Reform of the IHT Rules Applying to Trusts

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Last year, HMRC proposed that an individual’s IHT tax-free allowance (the nil-rate band) should be split across all trusts that he or she set up. At the time, the plans attracted some criticism and did not make the cut when the Finance Bill 2014 was unveiled. But now the plans have resurfaced in slightly amended form. What would the changes mean?

At the moment, a lawful estate planning strategy involves setting up multiple trusts on different days, in order that each trust will effectively have its own nil-rate band (currently £325,000). A series of smaller trusts, in comparison to one larger trust, can reduce the impact of the 10-year charge and benefit from multiple nil-rate band allowances.

HMRC have announced a consultation on proposals to restrict this practice (in fact, the third consultation on the same topic). Under the plans, settlements of property made during the settlor’s lifetime would be subject to only one nil-rate band. This would be known as the “settlement nil-rate band”, and would be separate from the current, personal NRB. The amended proposals would allow the settlor to choose how the settlement NRB is split between his various trusts, avoiding the situation where a portion of the allowance could be wasted on a trust that lacks the necessary assets to absorb it.

The consultation makes clear that the aim is to avoid “fragmentation of property across a number of settlements resulting in significant loss to the Exchequer”, and that “the Government wants to ensure that there is consistency of treatment between those individuals who transfer their assets on death and those individuals who make lifetime transfers through the use of trusts”. As there is only one nil-rate band for an individual whose assets pass on death, HMRC considers it is only fair to ensure the same applies for lifetime settlements.

It is not clear how these latest plans address the concerns raised last time around. Many believe that there would be practical difficulties in collating diffuse information about various trusts. This problem, if not insurmountable, could be cumbersome and expensive to overcome. Practitioners have also expressed doubt about HMRC’s original claim that the new “simplified” regime would entail a lighter administrative burden, with some insisting that the additional record keeping involved would actually lead to the opposite outcome.

It is envisaged that the new rules (if approved) will only apply to trusts created on or after 6 June 2014, as well as additions made on or after that date to an existing trust. Therefore those who have already engaged in this form of estate planning will most likely not be affected retrospectively. However, the prospect of a “dual IHT regime” for trusts is likely to create some confusion, and those with questions are encouraged to seek specialist advice via their usual Goodman Derrick contact.

This article was written by Ian Bradshaw, Partner, Private Client, with assistance from Trainee Solicitor, Alex Barker.

This guide is for general information and interest only and should not be relied upon as providing specific legal advice. If you require any further information about the issues raised in this article please contact the author or call 020 7404 0606.