Reforming Calculation Of Inheritance Tax On Trusts: From Simplification To Fairness?

HMRC Revenue and Customs ("HMRC") has published the results of its third consultation on simplifying the inheritance tax ("IHT") treatment of discretionary trusts. 1

The proposals are also relevant to most non-discretionary trusts if they were established on or after 22 March 2006.

Under the existing rules the above trusts are liable to an IHT charge every ten years on the value in the trust. There are also IHT "exit" charges on capital distributions. Under the proposals these charges still apply but the way in which they are calculated will be simplified as follows

each individual will have a so-called settlor's nil rate band ("SNRB") to allocate to any trusts that they establish it will no longer be necessary to gather historical information about the settlor's IHT position and that of all trusts established by him/her the basis of the IHT charges will be a flat rate of 6% HMRC's stated aim is simplification. Whether the reform will increase or decrease the IHT payable will vary from case to case.

The new SNRB is available to settlors only for trusts established or funds added to existing trusts after 6 June 2014. Such settlors must ensure that they take account of the future availability of the new SNRB. In other cases the old rules still apply for establishing the amount of the personal nil rate band ("NRB") available to any particular trust when calculating anniversary and exit charges. 2

This briefing is based on the Government's consultation document. More detail about how the proposee rules will work in particular cases will be available when the draft legislation is published in the autumn.

Which trusts are affected?

The simplification proposals relate to so called "relevant property" trusts. These are basically:

discretionary trusts (i.e. trusts under which trustees may distribute income and capital at their discretion) whenever established certain other kinds of trusts, for example, interest in possession trusts under which beneficiaries are entitled to receive income, set up on or after 22 March 2006 (but excluding certain such trusts set up in wills). Objectives of the proposals

After the initial establishment of a relevant property trust, IHT is payable on two kinds of occasion.

First, IHT is due on every ten year anniversary of a relevant property trust. The maximum rate is 6% although lower rates in practice often apply based on a complex calculation as set out in the IHT legislation IHT is payable on capital distributions...