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Technical View

Technical View

Proposed changes to the taxation of relevant property trusts


Welcome to this month’s Technical View, where we take a closer look at the proposed changes to the taxation of relevant property trusts now HMRC have finished their latest consultation period on simplifying the taxation of these types of trusts.

Technical View aims to answer queries received by you, as a financial adviser for your use when you meet clients in similar scenarios. We hope that this provides useful, topical and valuable information.

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HMRC published their third consultation paper on this subject on 6 June 2014 called "IHT: A fairer way of calculating trust charges". It focussed on changes to how the way periodic and exit charges are to be calculated, and the introduction of the “settlement nil rate band” which would apply to a settlor creating multiple relevant property settlements during their lifetime.


Announcements made by George Osborne in the Autumn Statement on 3 December 2014 reversed the introduction of the settlement nil rate band and proposed new rules relating to “same day additions” to relevant property trusts.
 

What do the new proposals actually mean?

 

  • Additions to relevant property trusts made on or after 6 April 2015, and made on the same day to more than one settlement, are to be treated as “related”. Essentially, these related settlements will have one nil-rate band that can be offset at the time the ten year periodic charge is due, thus removing the appeal of pilot trusts, which has been used to great effect. 

  • Regular premiums paid to, and death benefits paid from, whole of life or life assurance contracts placed into trust will not be affected by these proposals. 

  • Pension death benefits paid to a Bypass Trust will not be affected by the new proposals as long as the benefits are paid from a trust based pension scheme. Death benefits paid from a contract based pension scheme to a Bypass Trust will be deemed to be an addition and will be subject to the new proposals.

  • The proposed changes will apply to tax charges arising on or after 6 April 2015 in respect of all Relevant Property Trusts created on or after 10 December 2014. These rules will also extend to existing Relevant Property Trust which have not been funded (by the death of the settlor) before the 10th December 2014.

  • There will be protection from the new charging basis where multiple trusts i.e. a Will was in place before 10 December 2014 and the settlor dies before 6 April 2016.

  • The calculation for relevant property trust charges will be simplified by removing the requirement to take into account any non-relevant property which is held in other types of trusts (e.g. where there is a life interest). Only property held in relevant property trusts will need to be included in the calculation.

  • Under current rules, for the conditional exemption relating to heritage property to apply, the claim had to be made before the 10 year charge arises. The new proposals now mean the claim can be made within two years after the charge arises. For property settled by a Will in favour of the deceased's surviving spouse/ registered civil partner, within three months of their death, the property can be read back into the Will and this will be exempted from the IHT tax charge as well as being eligible for CGT holdover relief.
     

Note: It is important that Wills, which are written in conjunction with accompanies Pilot Trusts established prior to 10 December 2014, are not replaced until after 6 April 2016. This is because someone with such a Will who dies before 6 April 2016 will still have the benefit of multiple nil-rate bands for each of the Pilot Trust established. However, if such a person survives to 6 April 2016 then they need to review their Will as the same day additions to multiple trusts will apply, which could have significant tax and administrative consequences.

More information and clarification on these proposals will become apparent with the introduction of Finance Bill 2015 but hopefully this edition has provided some answers for you on similar queries you may have. If you have further queries on the content of this edition or other technical queries then please contact the Technical e-helpdesk at technical@sanlam.co.uk.

Date Issued: February 2015

This note is to be used by Financial Advisers only. It is not intended for onward transmission to a private customer and should not be relied upon by any other person. Sanlam accepts no liability for any action taken or not taken by an individual or firm as a result of the contents of this material. The tax treatments and information contained in this document is based on current tax law and HMRC practice as at February 2015 and may be subject to change in the future. Whilst we have made every effort to ensure the accuracy of this material, we cannot accept responsibility for any consequence (financial or otherwise) arising from relying on it. This document is for information purposes only and should not be treated as advice and independent taxation advice should be always sought.

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