This month one decade will have passed since the 2006 Budget, when the Government made important changes to the way in which most trusts are treated for the purposes of inheritance tax (IHT). What overall impact have these changes had and what should trustees watch out for from 22 March 2016 - the ten year anniversary date?
Essentially any lifetime trusts created on or after 22 March 2006 are treated as relevant property trusts (RPTs), if they are not bare trusts. This means firstly that non-exempt transfers into them will be chargeable lifetime transfers (CLTs) not potentially exempt transfers (PETs). Secondly, these trusts will also be subject to IHT reporting requirements, and have the potential to be subject to IHT exit charges when benefits are paid to the beneficiaries. Thirdly and critically, periodic charges to IHT occur upon every ten-yearly anniversary.
On the whole, the 2006 changes have had little impact. It is though important to note that advisers have recommended to clients that they shouldn’t place non-exempt transfers into relevant property trusts over the nil rate band (NRB). Transfers are CLTs and if the total number of CLTs over any rolling seven-year period did exceed the NRB, the excess would trigger an immediate 20% IHT liability which most clients will understandably wish to avoid.
Where a chargeable lifetime transfer is made within the available nil rate band they are treated in virtually the same way as PETs. If there is no IHT liability when the trust is created, this would result in there being no IHT exit charge if benefits are paid out within the first ten years of the trust.
The clock is now ticking with 22 March 2016 now just a few weeks away, so we can expect the first ten-yearly anniversaries to start occurring soon and trustees of post-22 March 2006 RPTs have not been faced with this before. What does this mean to trustees – and their advisers – in practice?
First, Trustees must not put their head in the sand and must recognise that the ten-yearly anniversary has arrived. No reminder will be sent to them – it is solely their responsibility. Second, they will need to consider whether there is any need for them to inform HMRC of the occurrence of the ten-yearly anniversary. This is only required where the relevant value exceeds 80% of the NRB at the ten-yearly anniversary (or twice the NRB where there are two settlors). Broadly, the relevant value is the total of the trust fund, plus any distributions of capital that have been made to the beneficiaries in the previous ten years (see below), plus any CLTs made by the settlor(s) in the seven years prior to the trust’s commencement date.
Note that distributions of capital in the previous ten years will NOT include the following:
• Loan repayments to the settlor under a gift & loan trust
• Regular payments to the settlor under a discounted gift trust
• Maturity payments to the settlor under a flexible reversionary trust
However, it should also be noted that any assignment of policy segments to one or more beneficiaries WILL be regarded as payments of capital for these purposes.
Where the total amount exceeds the reporting limit (80% of NRB / £260,000 at 22 March 2016), the trustees will need to submit forms IHT100 and 100d to HMRC within six months of the ten-yearly anniversary. These forms are available from https://www.gov.uk/government/publications/inheritance-tax-inheritance-tax-account-iht100.
In addition, the trustees will need to pay tax to HMRC if the total exceeds the available NRB. At current rates, the liability will be 6% of the excess over the NRB. Usually, the trustees will be able to pay this from trust assets or the trustees will need to consider other resources from which the funds can be obtained.
Fundamentally it is likely that many trustees will be unaware of their obligations in this area and will be looking to their advisers for assistance. It will therefore be essential for advisers to be alert to the upcoming ten-yearly anniversaries for their clients, in order to inform them in plenty of time and to give appropriate assistance in helping them to discharge their responsibilities.