On 10 December 2013, HMRC published its own response to the responses made by the professional bodies and others to the May 2013 consultation, Inheritance Tax: Simplification of Trust Changes. HMRC has announced changes in some areas but the deferral of decisions and further consultation in others.
The objective of the original consultation had been to identify ways in which the inheritance tax rules for ‘relevant property’ trusts – i.e. those in relation to ‘ten yearly’ and ‘exit’ charges – could be simplified. HMRC received 53 responses from individuals, trustees, practitioners and professional bodies and the key elements of HMRC’s response are set out below.
Income retained but not accumulated
Currently, by concession, income which is retained by trustees and which has not been formerly ‘accumulated’ (i.e. added to capital) is not subject to ‘relevant property’ charges. HMRC have always taken the view that income retained for too long should not be given this special treatment; however identifying a definitive legal basis for determining when this is has been difficult.
From 6 April 2014 a deemed rule is therefore to be introduced. Retained income will be deemed to be capital if it has been held for more than five years and the following points should be noted:
- Time prior to 6 April 2014 will be counted. Thus, any income already held at that date could become subject to charge immediately – e.g. if there was a ten yearly anniversary on 7 April 2014.
- The deeming rule will apply only for inheritance tax purposes. The income will still be income for all other tax purposes – particularly income tax.
- The deeming rule will apply only for the purposes of ten yearly charges and not exit charges. This is very helpful because it means that trustees distributing such income will need only to consider the income tax issue and not potential inheritance tax issues at the same time.
- Finally, when the rule applies at a ten yearly anniversary, there will be no time apportionment. Instead the income will be deemed to have been capital for the whole of the previous ten years.
Filing dates & self-assessment
From 6 April 2014, filing and payment dates for inheritance tax returns in relation to trusts will be aligned to six months after the end of the month in which the event occurred.
The proposal to have set times each year when returns had to be submitted – i.e. as for ‘self-assessment’ – have been dropped.
Likewise, the proposal to introduce formal self-assessment in this area has also been deferred until Finance Bill 2015.
Simplifying the calculations / splitting the nil rate band
The most controversial aspect of the original proposals was that there would one nil rate band per settlor which would then be split between the number of settlements he or she created. This was seen by many as a revenue generating change which would have impacted on much of what is considered to be standard inheritance tax planning – i.e. establishing trusts every seven years, and the use of multiple ‘pilot’ trusts. It would also have brought its own complexity to the calculations to the extent that trustees would have had to identify a settlor history of trust making in order to complete their own calculations.
There will therefore be further consultation in relation to the simplification of the calculations with a view to legislation being introduced in Finance Bill 2015. What is not entirely clear at this stage, is whether the idea of splitting the ‘nil rate band’ is now completely off the table. HMRC’s response document itself is a little ambiguous stating that HMRC will ‘…consult further on alternative proposals to split the nil-rate band…’ but elsewhere that the further consultation will be on ‘…alternative ways in which the calculations can simplified fairly…’.
Even if the eventual simplification changes do not introduce nil rate band splitting, it, of course, remains open to HMRC to introduce separate amending legislation to, for example, block the use of multiple pilot trusts as a means of reducing potential relevant property trust charges.
Draft legislation for inclusion in Finance Bill 2014 on the treatment of accumulated income and the alignment of payment and filing dates was published on 10 December 2013 and the further consultation document in relation to the simplification of the calculations is expected early this year.