HMRC Consultation on Inheritance Tax | KPMG | IM

HMRC Consultation on Inheritance Tax (“IHT”): Simplifying Charges on Trusts

HMRC Consultation on Inheritance Tax

HMRC have issued a further construction document with regard to the simplification of IHT charges on Trusts, following responses to its original construction on the subject in July 2012. The construction document includes a summary of responses to the original construction and develops HMRC’s proposals in this area.

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Under the relevant property trust (“RPT”) regime, trustees are required to file IHT accounts every ten years (“the ten-year charge”) and whenever relevant property leaves a trust (also known as an “exit charge”). In order to submit the required IHT accounts, trustees may have to obtain extensive historical data which is not always easily available. In addition, the IHT computations can be complicated and the filing and payment deadlines confusing. HMRC wish to simplify the ten-year and exit charges for trustees, align payment and filing dates for these charges with those of Self Assessment and clarify the treatment of accumulated income for the purposes of the RPT regime. In order to achieve this, they have made the following proposals.

Simplifying IHT calculations

HMRC have proposed the following simplifications when calculating the IHT payable on ten-year and exit charges for RPTs.

  • Ignoring the settlor’s previous lifetime transfers in determining the available nil-rate band (“NRB”) when calculating the ten-year and exit charges, reducing the amount of historical data required.
  • Ignoring non-relevant property when calculating the ten-year and exit charges, again reducing the amount of historical data required.
  • Calculating the IHT due on the chargeable transfer using a rate of 6%, simplifying the tax calculations.
  • Splitting the NRB by the number of RPTs created by the settlor. HMRC believe that this measure will not only reduce the amount of historical data required by the trustees when completing their account, it will also mitigate any tax advantage a settlor may have obtained under the current regime by creating multiple settlements.

Accumulated income

Under the current regime, accumulated income is included as relevant property for the purposes of a ten-year or exit charge at the point that it is accumulated by the trustees and added to the trust capital. This has caused confusion where the trustees have the power to accumulate and distribute income, but no distributions have been made. If no formal accumulation is made by the trustees, there has been confusion as to when the income forms part of the relevant property for the purposes of the RPT regime.

HMRC have proposed that:

  • “income which is accumulated and added to capital is relevant property for the purposes of the ten-year and exit charge calculation from the date at which the accumulation takes place” (this is in accordance with current practice); and
  • undistributed income, where the trustees have the power to accumulate and distribute income, is deemed to be accumulated and added to the capital of a trust from the start of the second tax year after the end of the tax year of receipt, if it has not already been accumulated. For example, income received on 30 April 2007 would be deemed to be capital (and therefore relevant property for the purposes of any ten-year and exit charge) from 6 April 2010, if the trustees had not already formally accumulated the income.

Filing and payment deadlines

HMRC propose to align the filing and payment deadlines in relation to ten-year and exit charges with the deadlines for Self Assessment. It is proposed that the filing deadline for IHT accounts will be 31 October after the end of the tax year in which the charge arose and any tax payable will be due by the following 31 January. Trustees will be required to self assess the IHT due, whereas under the current system the trustees can ask HMRC to calculate the tax payable for them.

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