Simplification of IHT charges in relevant property trusts – what might it mean for your clients?

 In Gill's Blog, Tax, Trusts

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There are three main occasions when IHT may be charged on relevant property trusts, namely:

  • The entry charge levied when an individual settles assets in a trust. Tax is charged at a rate of 20% on the chargeable value of the assets transferred into trust in excess of the IHT nil-rate band.
  • The 10 year periodic charge levied on each tenth anniversary from when it was set up. This can be up to 6% of the chargeable value of the property in the trust.
  • An exit charge applied when assets are transferred out of a trust, or the trust comes to an end.

HMRC published a consultation paper “Inheritance Tax – simplifying charges on trusts” in July 2012 identifying a number of possible areas for simplification or reform.

A second consultation document was published on 31 May 2013 building on the feedback to the first consultation and identifying three separate areas for reform:

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  • Simplifying the IHT calculations
  • Treatment of accumulated income
  • Aligning the filing and payment dates

The proposed changes

Simplifying the IHT calculations

The work required to calculate the periodic charge is disproportionate for some small trusts with the fees involved being in excess of the tax charged. This is because of the historic data required to establish values is time consuming to compile and therefore costly to acquire. HMRC believe that the following changes would remove some of these practical difficulties:

  1. If the settlor’s previous lifetime transfers were ignored in determining the available NRB for the purposes of the calculation of the hypothetical transfer on exit charges and periodic charges this will avoid the problems & associated costs of having to obtain historic records & valuations
  2. If non-relevant property was also ignored for the purpose of calculating the exit and periodic charges the trustees would only be required to know information regarding exits from the trust and other trusts in the last 10 years rather than old information
  3. If the NRB is split by the number of relevant property settlements created by the settlor this will alleviate the risk that settlors might seek to fragment the ownership of property across a number of trusts to maximise the availability of reliefs or exempt amounts. There would be no need for the related settlement rule. Instead, the NRB would be spilt between all relevant property settlements in existence at the relevant time (NB this could therefore include ones set up at the same time but since wound up)
  4. A single rate of 6% of the chargeable transfer be used in the calculations rather than the lengthy calculations of effective and settlement rates

Income accumulation

The ability to accumulate undistributed trust income is available to many trusts and therefore the point at which any accumulated income is regarded as an addition to the capital of the fund is a grey area and yet needs to be known for IHT in order to correctly calculate the periodic and exit charges.

HMRC therefore propose that accumulated income:

  • Which is accumulated is added to the capital and becomes therefore relevant property of the trust from the date on which the accumulation takes place – this is the current treatment; and
  • Is deemed to be accumulated and added to the capital of the trust if income arises to a trust where the trustees have a power to accumulate or a duty to accumulate coupled with a power to distribute and it remains undistributed from the start of the second tax year after the end of the tax year of receipt. These deeming provisions will not apply if the income has already been formally accumulated by the trustees or treated as such by the terms of the trust.

Aligning filing and payment dates

IHT payment and filing dates differ than the deadlines for self assessment and cause confusion. Under the current rules there may be situations where the due date for payment falls before the due date for delivering an account. At present the trustees of a trust may ask HMRC to calculate the tax for them.

HMRC propose:

  • To align the filing and payment dates for IHT with those under self assessment – The submission of IHT forms would be required by 31 October after the end of the tax year in which the charge arose and the IHT payment would be due by the following 31 January
  • That the trustees would be required to self-assess the tax due and the due date for the payment of the tax would be made clear on the IHT 100 – with the result that if no entry for the tax due is included in the form the return would be considered incomplete and late filing penalties could follow. Equally, if the figure entered was wrong, the incorrect return penalties could apply
  • The alignment would only affect periodic and exit charges and not the entry charge nor the charge to IHT on death or other lifetime transfers. These would retain their current payment & filing dates


These simplification proposals will potentially:

  • Remove the tax efficiency of creating pilot trusts
  • Increase the amount of IHT charged since in many trusts the rate of tax is not as high as the proposed flat rate of 6%
  • Introduce charges on small trusts where previously they were within the NRB treatment
  • Attack all existing benefits of pilot trusts set up before the proposals become law since there is no reassurance that trusts established before the changes will be excluded
  • Encourage distribution rather than accumulation of income
  • Remove the ability of trustees to seek HMRC’s assistance in calculation the tax due
  • Give rise to potential penalties
  • Create more cost in terms of compliance in trying to uncover all trusts created by the settlor even though they may be in respect of dormant assets and totally forgotten

Watch this space as the proposals may be in the Finance Bill 2014!

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