The Revenue have announced new rules preventing people reducing their exposure to inheritance tax by setting up multiple trusts for their heirs, each with a £325,000 tax free allowance.
Under the plans, which are intended to come into force in April 2015, they would have only one £325,000 allowance, which could be divided between several trusts and both the person setting up the trusts and the trustees could face penalties if they miscalculate the tax-free allowance.
The aim of the proposals is to ensure that there is consistency of treatment between those individuals who transfer their assets on death and those individuals who make lifetime transfers through the use of trusts.
At present, all individuals are entitled to a nil-rate band – currently £325,000 – before inheritance tax is chargeable. Where individuals give away property to trusts during their lifetime that nil rate band refreshes every seven years. This means that an individual could effectively set up a trust up to the value of the nil-rate band every seven years and there would be no inheritance tax payable by the trustees.
However, the latest proposals would give each individual one special ‘settlement nil-rate band’ that would last for their lifetime. Individuals would then specify how the nil-rate band should be divided between any trusts they establish. This will result in considerably more new trusts falling into the inheritance tax net, increasing the total inheritance tax payable by trustees.
HMRC gives an example in their consultation document to illustrate this point. Under the existing rules a couple aged 40 could give away £3.25m to trust, by the age of 75, with no inheritance tax cost. Under the new rules this would drop to £650,000.
At the same time HMRC intends to ask trustees to self-assess their inheritance tax calculation. The consultation also proposes a new flat rate of 6% for inheritance tax which is intended to make calculations of inheritance tax charges more straightforward.
This is an ongoing consultation and no final decisions have yet been taken but if the proposals are of concern to you and your family please give us a call.