Inheritance Tax (“IHT”) Simplification

On 6 June, the Government announced a third consultation on simplifying Inheritance Tax charges within relevant property trusts. The term relevant property trust covers all existing discretionary trusts and the majority of other lifetime trusts established after 22 March 2006.... Read more

Blog2nd Sep 2014

By Sarah Munro

On 6 June, the Government announced a third consultation on simplifying Inheritance Tax charges within relevant property trusts.

The term relevant property trust covers all existing discretionary trusts and the majority of other lifetime trusts established after 22 March 2006.

Relevant property trusts are subject to potential IHT charges on every 10th anniversary of the creation of the trust and on assets leaving the trust (“exit charges”).

At present the rules for calculating these charges are very complex and time-consuming.

Settlement Nil Rate Band

Currently each relevant property trust has its own Nil Rate Band (“NRB”).

The proposed changes will see each individual being entitled to a Settlement Nil-Rate Band (“SNRB”), which will be separate from and unconnected to their own personal NRB. The SNRB will be the same as and will change in line with the individual NRB, however the SNRB will not renew after 7 years.

Administration

The Settlor (or Truster) will be responsible for deciding how to allocate their SNRB between settlements which they have created. The SNRB will be allocated on a percentage basis and the Settlor will be required to ensure that the total SNRB allocated by them does not exceed 100%.

The Settlor is also required to provide this information to the Trustees. If the percentage allocation is not made known to the Trustees then they must calculate any IHT charges on the basis that no SNRB is available.

The allocation of the SNRB can be amended or withdrawn at any time up to the due date for payment of the first charge. Once the allocation has been used to calculate a charge, the allocation cannot then be reduced.

Where a settlement is wound up in full and all funds paid out absolutely during the lifetime of the Settlor, the SNRB may be re-allocated between other Trusts which they have set up.

Self Assessment

The current requirement to calculate an effective rate of tax on each exit and 10 year anniversary will be removed and replaced with a standard 6% IHT charge. Trustees will be required to self-assess the tax due on charges arising within the Trust.

It is considered by HM Revenue & Customs that this will not be too burdensome as much of the complexity in performing the calculations has been removed.

Who will be affected?

The new rules will affect the calculation of exit and periodic charges arising from 6 April 2015 and will apply to:

  • New Trusts created after 6 June 2014
  • Additions to existing Trusts made after 6 June 2014
  • Estates of persons dying after 6 June 2014

If you require any further information please contact Alison Beattie (alison.beattie@aab.co.uk) or Lisa Tait (lisa.tait@aab.co.uk) or your usual Anderson Anderson & Brown LLP advisor.

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