HMRC consultation on taxation of trusts for Inheritance Tax

Taxation of trusts can become a very complex matter with huge cost implications for the inexperienced. HMRC have issued a consultation document on 31 May 2013 which contained proposals to simplify the inheritance tax (IHT) charges currently imposed on trusts.

Broadly, four areas were addressed:

  1. The treatment of accumulated income in trusts
  2. The alignment of payment and filing dates for trusts
  3. Simplifying the Inheritance tax 10 year anniversary periodic and exit charges by ignoring previous chargeable lifetime transfers
  4. Sharing the nil rate band between relevant property trusts created by the same settlor

On 10 December 2013, HMRC issued a summary of the responses received to this consultation. The first two issues were relatively simple and so draft legislation has now been produced for comment with the intention of it being included in the Finance Bill 2014.

As far as the second two issues are concerned, HMRC seems to have noted that, having considered all responses received, that there are genuine concerns with the proposed division of the nil rate band. The two key objections were that the proposed changes would be just as or even more complex than the current regime for advisers and trustees and that applying what was perceived as retrospective legislation to existing arrangements was unfair on the settlors.

It is therefore very encouraging that, as a result, HMRC is prepared to consider alternative ways to achieve simplification of the Inheritance tax calculations, provided that the alternatives are fair and do not result in a loss to the Exchequer.

A further consultation is therefore to take place, publication being expected at or near the Budget 2014. Any legislative changes will be included in the Finance Bill 2015.

Although it is disappointing that finalisation of the new regime will be deferred for another twelve months, it is important that any changes that are introduced are properly thought through, rather than being rushed simply to adhere to an arbitrary deadline.

It seems clear to us that HMRC are approaching the issue with an open mind and it is hoped  that the next round of consultation will deliver a result that is simpler for trustees and advisers and yet which preserves the legitimate expectations for existing trusts.

As always this is a very complex area of financial planning and so expert advice is required as there are significant traps for the inexperienced settler.