Tax Update – for the Wills, Probate & Trust practitioner

 In Tax

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Our work is never dull – the ground rules are always changing and we have to be nimble on our feet to avoid the potential to get stuck in the mud. Changes of Government particularly result in changes of emphasis or policy at the Treasury and therefore in the actions and behaviour at HMRC. Here I plan to provide the practitioner with a round-up of current developments in tax as they affect the Wills, Probate and Trust practitioner.

Statutory developments

The Finance Bill 2011 passed its second reading unamended on 26 April 2011. The hard work on the Bill now begins as the committee stages started on 4 May 2011. There was not much meat in the Budget for private client practitioners:


  • The Nil Rate Band (NRB) remains frozen at £325,000 until 5 April 2015
  • Thereafter the Consumer Prices Index (CPI) will be used to index it rather than the Retail Prices Index (RPI). Both are measures of inflation by which the average changes month-to-month in prices of consumer goods & services purchased in the UK are monitored. There are differences in coverage and methodology between the indices most particularly the RPI includes items covering owner-occupier housing such as mortgage interest payments, which the CPI does not.
  • With the CPI running at 4% in March and the RPI at 5.3% will this mean that more clients will be interested in using the NRB discretionary trust in their Wills as inflation increases the value of their estates whilst the NRB is frozen? It is likely that using the NRB of the first spouse to die and populating it with assets likely to grow in value will be more beneficial than relying on the NRB and transferable NRB against the joint estate on the second death as inflation pumps up value of the assets but the NRB remains frozen.


  • The Annual Allowance was increased for individuals to £10,600 and therefore for trustees to £5,300.
  • From 6 April 2012 the CPI will be used to index the annual exemption instead of RPI.
  • The Lifetime Allowance for Entrepreneur’s Relief (ER) doubled to £10 million from 6 April 2011. This means over a person’s lifetime this could potentially save them £900,000 of tax, as compared to the £80,000 which the initial value of the allowance would have saved.
  • Although this is a significant relief remember it only applies to trusts in a restrictive way – there has to be an interest in possession trust with the life tenant being a qualifying beneficiary – that is, the person who is working in the business and must themselves own, for example, 5% of the shares in the company the shares for which the trust are trying to sell. They must also have 5% of the voting rights not just 5% of the share capital; so it is sometimes difficult for a trust to benefit from ER.


There are some significant changes in the pipeline for estate practitioners and those who advise non-domiciliaries:

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  • 10% Charity reduction in rate for IHT
  1. In the Budget it was announced that there would be a reduction of 10% in the rate of IHT from 6 April 2012 for estates leaving 10% or more to charity.
  2. This means a reduction from 40% to 36% IHT rate NOT a reduction from 40% to 30%.
  3. It is not straightforward to implement this part of Government strategy. It will necessitate considerable amendments to the IHTA 1984 and will be complex in its application considering it applies to a deceased’s NET estate and will not take account of failed PETs, for example.
  4. The practicalities for probate practitioners need careful thought so HMRC has already entered into consultations with representative bodies in order to be prepared.
  5. There will be a formal consultation over the summer with a view to issuing draft legislation in November in time for the Finance Bill 2012.
  6. Given the application of the NRB and the transferable NRB which makes most estates non-taxable, its significance for most estates will be zero. However, it is likely many people will be misinformed and will need you to explain its application to their circumstances.
  7. Drafting Wills for spinsters, bachelors and the divorced etc who only have one NRB to play with may need care if the ambition is to mitigate IHT on chargeable estates by a careful mix of legacies to chargeable and charitable beneficiaries. A formula clause will doubtless be required because it will not be known until death whether this reduction in rate will apply to the particular estate.
  • Non-domiciliaries
  1. In the Budget it was announced that the annual charge for non-domiciled individuals who had been resident for 12 or more years was to increase to £50,000 from £30,000 to avoid paying UK income tax on their remitted income.
  2. Also, it was announced that there would be a consultation to formulate a statutory residence test. Residence is a cornerstone of taxation – It determines whether a person is liable to UK income tax on some or all of their income – and yet it is not defined by statute, instead the courts have had to explore what it means.
  3. IR20 was the HMRC booklet which set out HMRC’s interpretation and whilst it was always said not to be legally binding it did for the best part of 20 years become the text which was largely followed by all concerned. It contained a day count system which basically said if you are resident in the UK for 182 days a year then you are resident for that tax year but if you are present for less than 91 days per year on average you probably were not resident.
  4. Then we had the HMRC v Gaines-Cooper decision in 2006 which threw out the rule book. Although Mr Gaines-Cooper had originated in the UK, and therefore had been resident here, in 1976 he moved to the Seychelles, leaving his wife and son resident in the family home in the UK. He visited frequently but never for more than 91 days on average per year. The Courts decided that the day count was irrelevant because he had never severed his residence status as his wife and child continued to live in the family home. IR20 was withdrawn and HMRC6 was born but it begs more questions than it provides answers. Practitioners are therefore in a difficult position at present when trying to advise clients as to their status.
  5. Many countries have a statutory residence test (e.g. USA and Ireland) so it is excellent news that the consultation is to begin and it is hoped that it results in a workable statutory residence test in the UK to be included in the Finance Bill 2012.

Disclosure of Tax Avoidance Schemes & IHT

DOTAS started in 2006 to enable HMRC to gain early information about tax arrangements; how they worked and who had used them. With effect from 6 April 2011 schemes which seek to avoid IHT charges associated with the transfer of property into trust come within the disclosure rules.

For more information on the changes see my blog dated 5 April 2011.

Excepted Estate changes

The Inheritance Tax (Delivery of Accounts) (Excepted Estates) (Amendment) Regulations 2011 [SI2011/214] came into force on 1 March 2011. They bring into effect some tidying up of the rules but in essence their main purpose is to increase the number of estates for which the IHT 400 will not be required, and do so by accommodating the transferable NRB.

For ‘small estates’ where the gross estate is within one NRB you use the IHT 205 instead of the full account – the IHT 400. This is extended for deaths on or after 6 April 2010 (it is in effect retrospective) to include those estates where the deceased inherited a transferable NRB from a deceased spouse or civil partner.

The intention is only to permit the use of the IHT 205 in the simplest cases – i.e. where the WHOLE of the transferable NRB is available to the surviving spouse or civil partner.

Exempt estates, where the gross estate does not exceed £1 million and the net estate, after deducting liabilities and available spouse or charity exemption does not exceed the NRB, are also enhanced to include the transferable NRB.

For deaths occurring on or after 1 March 2011 a restriction has been introduced on the normal expenditure out of income exemption when determining whether an estate can qualify as an excepted estate.

For the sole purpose of deciding whether the estate is excepted or not all transfers over the £3,000 annual exemption will be treated as chargeable transfers. If as a result the estate cannot qualify as an excepted estate the IHT 400 has to be used and the normal expenditure out of income relief claimed on IHT 403. This avoids cases slipping through the net without HMRC being able to check whether they agree that the relief was due.

Practice points

  • Despite the Office of Tax Simplification recommending to Government that IHT should be reviewed that is not on the list of changes as yet but in the meantime there are a number of changes afoot which will make it more, not less, complex
  • Familiarise yourself with the ‘grandfathering rules’ for DOTAS so you can put in place suitable risk management procedures in your office
  • Do read the ‘10% charity reduction rate for IHT’ consultation document carefully when available in late May/early June – it will be complex
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