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June 10, 2014

Simplification of Tax Charges on Trusts

New Consultation

HMRC released a new consultation Inheritance Tax: A fairer way of calculating trust charges on 6 June 2014.

The consultation focuses on the way the nil rate band is allocated to trusts and how this affects the tax liability when funds are distributed (exit charge) and on each 10 year anniversary (principal charge).

Under current rules, it is possible for settlors to set up multiple trusts over consecutive days with each trust benefitting from its own nil rate band, known as pilot trusts.

Previous consultations proposed that the nil rate band should be split equally across all trusts created by a settlor.  This would have a significant impact for those that have already undertaken pilot trust planning as well as increasing the administrative burden for trustees who would need to establish the number of trusts created by the settlor.  There is also a risk that part of the nil rate band could be wasted where a settlor has created a number of low value trusts.

In light of the concerns raised in previous consultations, HMRC have revamped their plans and now propose to bring in rules under which settlors would be required to make an election specifying the percentage of their Settlement Nil Rate Band (SNRB) which should be allocated to each trust.

The trustees will calculate the trust charges based on a copy of the election provided to them by the settlor.  In the absence of an election being received, the trustees should assume that none of the settlor's SNRB is available.

The new rules would take effect from 6 April 2015 but anti-forestalling rules mean that trusts created after 6 June 2014 and additions to existing trusts after 6 June 2014 will be subject to the SNRB election procedure.

Responses to the consultation are requested by 29 August 2014.

Other Trust Changes

1. From 6 April 2014 the due dates for the payment of tax and filing of returns have been aligned to 6 months after the end of the month in which the chargeable event took place.

2. For the purposes of the 10 yearly periodic charge only, income which has not been distributed for 5 years will be added to the capital of the trust.  An exit charge will not apply when the income is eventually distributed.

Trustees with the power to distribute income should therefore review their distribution policies before the next 10 year charge.

3. Other changes to the calculation of 10 yearly/exit charges (such as the 6% flat rate and requirement for trustees to self-assess the amount of tax due) are expected to be introduced in the Finance Bill 2015


Contact us today to discuss your tax requirements.
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