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This publication is available at https://www.gov.uk/government/publications/hm-revenue-and-customs-trusts-and-estates-newsletters/hmrc-trusts-and-estates-newsletter-september-2015
Welcome to the September 2015 edition of the HM Revenue and Customs (HMRC) Trusts and Estates Newsletter.
If you have any issue that you would like addressed in a future edition, please email email@example.com.
The next edition of the newsletter will be December 2015.
Finance (No.2) Bill 2015
The Finance (No.2) Bill 2015 contains a number of measures that apply to Inheritance Tax (IHT).
A. Residence nil-rate band (RNRB)
An extra residence nil-rate amount will be introduced for deaths on or after 6 April 2017. This will be phased in over a period of 4 years so that for deaths in 2017 to 2018 the maximum additional amount will be set at £100,000, rising to £125,000 for 2018 to 2019, £150,000 for 2019 to 2020 and to £175,000 for 2020 to 2021 - it will be indexed in line with the Consumer Price Index (CPI) from 2021 to 2022 onwards.
The essential features of RNRB are as follows:
- it is only available where the deceased’s residence, or a share in a residence, is inherited by direct descendants
- direct descendants includes children, step-children, adopted children, foster children, grandchildren, great-grandchildren etc - it does not apply where the residence is left to parents, siblings, nephews, nieces or other relatives
- a direct descendant inherits property when they become absolutely entitled to it, or beneficially entitled to a qualifying interest in possession in the property, or the property is held on trust for a bereaved minor, or on 18-25 trusts
- it applies to a single residence that is part of the deceased’s estate on death, whether owned directly by the deceased, or to which they are beneficially entitled through a qualifying interest in possession or gift with reservation (GWR)
- the residence must have been lived in by deceased at some stage but it does not have to have been their main residence
- the amount of RNRB will be the lower of the value of the residence, or share of it, and the maximum available amount, if the value of the residence is more than the maximum amount, the excess can be added to other assets in the estate and the existing nil-rate band is applied in the usual way - the value of the residence does not have to be greater than the existing nil-rate band (or transferable nil-rate band)
- it only applies to the estate on death, so it is not taken into account when calculating the tax payable on any failed potentially exempt transfers (PETs) or other lifetime transfers
- if RNRB is not used when the first of a couple dies, or to the extent that it is not used by a transfer on the death of the first of a couple to die, the unused proportion may be transferred to the surviving spouse or civil partner - limited to 100% of the RNRB available at the survivor’s death - this applies irrespective of when the first of the couple dies
- the personal representatives of the survivor must make a claim to transfer any unused RNRB
- for larger estates, RNRB available will be tapered away where the net estate (assets less liabilities but before exemptions and reliefs) exceeds £2m at a rate of £1 withdrawal for every £2 of value over £2m
- where the first of a couple dies before 6 April 2017, the personal representatives of the survivor will be able to claim an increase in RNRB of 100%, irrespective of the circumstances that applied on the earlier death - all that is necessary is that the survivor was married to, or in a civil partnership with the individual who died first when they died
- however, the taper will still apply to RNRB that is transferable from a pre-6 April 2017 death, so if the net estate exceeded £2.35m, there will be no RNRB to transfer
- there will be a technical consultation in the autumn about how RNRB should work where a person has downsized or ceases to own a residence after 8 July 2015
As part of this measure the nil-rate band is to remain frozen at £325,000 until April 2021.
B. Relevant property trust changes
A number of changes have been made to the relevant property trust charges to tackle avoidance, to simplify the process for calculating trust charges and to remove some anomalies.
The new concept of a ‘same-day addition’ is introduced by sections 62A-62C IHTA. With effect from Royal Assent, where property is added to a number of settlements on the same day, the value of the addition to all the settlements concerned and the initial value of relevant property settled in each settlement is taken into account in arriving at the hypothetical cumulative total when determining the rate of tax to be charged at the other settlements. This removes the advantage that existed where small amounts were settled in a number of settlements made on different days and larger sums were added to those settlements on the same day.
There are a number of exclusions from the new rules; these are where:
- the property in all the settlements concerned is held for charitable purposes only and without time limit
- the addition is the payment of a regular life insurance premium
- the addition is a lifetime transfer and the increase in the value of the settlement is less than £5,000 – this is to exclude small transfers where the settlor may give the trustees funds to discharge fees they have incurred etc
There is also an exclusion for additions to existing settlements made under a Will executed before 10 December 2014, or where such terms have been carried forward to a later Will. But this only applies where the deceased dies before 6 April 2017, so that taxpayers are not caught out by the changes and have sufficient time to change their Will.
Changes have been made to the categories of property that are taken into account to determine the rate of tax that applies to relevant property, either at the ten-year charge or on exit. With effect from the date of Royal Assent, the historic value of excluded property will no longer be taken into account in arriving at the value of the hypothetical chargeable transfer. And from the same date, a break is made between relevant property settlements and 18-25 settlements in that 18-25 settlements can only be related with other 18-25 settlements, instead of any other trusts created on the same day as well.
Amendments will apply after the date that Finance (No.2) Bill 2015 receives Royal Assent to charges arising under section 80 so that where one party to a couple succeeds to a life interest to which their spouse or civil partner was previously entitled during the latter’s lifetime, neither party will have a qualifying interest in possession and so the settled property will be treated as comprised in a settlement and subject to the relevant property charges. To prevent the change in the legislation triggering the creation of a relevant property settlement where these circumstances already exist, the commencement of the relevant property trust is aligned with the ending of the current interest in possession.
Also with effect from Royal Assent, section 79 is amended so that trustees of relevant property trusts have 2 years after the 10-year anniversary to make their claim for conditional exemption, instead of having to make the claim and the property designated before the charge arises.
Where a death occurs on or after 10 December 2014, section 144 is amended so that where property is settled by Will and an appointment is made before an interest in possession subsists in the property, the provisions of section 65(4) are ignored. This removes what is known as the ‘Frankland’ trap, so that where an appointment in favour of the surviving spouse or civil partner is made within 3 months of death, exemption is available.
C. Changes for IHT Online
Two minor changes are made to the provisions relating to late payment interest in preparation for the switch to the online submission of IHT accounts. The amendments are necessary to take account of regulatory changes that have happened since 2009 and allow provisions relating to financial institutions and companies to be updated, and to correct an error in paragraph 9 Schedule 53 FA 2009 affecting the late payment interest start date. These changes will come into force at a time to match the development of IHT online.
Regulations to facilitate electronic communications for IHT have already been published as the Inheritance Tax (Electronic Communications) Regulations SI 2015/1378; Directions have been made under those regulations to support the operation of IHT online and set out the details of how electronic communications should be used to deliver accounts and other information.
D. Non-domiciles (non-doms)
Deemed domicile rules
There is to be a consultation on proposals to introduce a deemed domicile rule for Income Tax and Capital Gains Tax (CGT) and the alignment of the deemed domicile rules for IHT. The consultation will include the proposal that someone with a UK domicile of origin at birth would, if they left the UK and acquired a domicile of choice abroad, be treated as re-acquiring a UK domicile immediately they became resident in the UK again, even if only temporarily. And whilst they were resident and therefore treated as domiciled in the UK again, any trusts which they had set up whilst domiciled abroad would lose their excluded property status for the period the individual was treated as domiciled in the UK.
A separate consultation will include the proposal that UK land that is currently excluded from IHT should be within the charge to IHT. This would bring land that is owned by an offshore company where the shares are held by either a non-dom or trustees of a trust into charge
E. Disclosure of Tax Avoidance Schemes (DOTAS)
Draft regulations have been published to strengthen and extend the scope of the IHT DOTAS ‘hallmark’ Draft legislation - disclosure of tax avoidance schemes (DOTAS). The proposed new hallmark will require disclosure of any arrangements – whether designed to deliver a tax advantage in respect of a lifetime transfer or the estate on death – which an informed observer, taking account of all relevant circumstances, could reasonably conclude were only made to gain an IHT advantage. However, to be disclosable, there must be an element to the arrangements which has only been included to obtain the tax advantage; or the arrangements must contain one or more contrived or abnormal steps without which, the tax advantage would not have arisen. These conditions will exclude the normal use of exemptions and reliefs from disclosure.
The regulations also specifically exclude from disclosure any changes made to a Will or Codicil; certain types of discounted gift trusts and gift and loan trusts which are considered to be acceptable tax planning.
F. Deeds of Variation
Page TNRN1 - note 3 - deciding the trustees’ residence status for Income Tax and CGT purposes. The wording has been changed to confirm that only where the trustees acting during the period of non-residence are corporate will the foreign income for that period not be assessable for the year.
IHT Online moves into private beta from September
From late September to November, if a Grant of Probate is required and there is no IHT to pay, selected personal applicants will be invited to use the IHT Online service instead of completing a paper form IHT205.
Using the online service
Personal applicants are eligible to use the IHT Online service as an executor where there is no IHT to pay and they are applying for probate in England or Wales.
This early use will be limited to a small number of invited customers as the service is in private beta. Towards the end of the year, once this pilot has been completed, any personal applicant who is eligible will be able to use the service.
What are the benefits to personal applicants using the IHT Online service?
It’s easy to follow.
There is no need to worry about Inheritance Tax forms being delayed or lost in the post.
People only see questions that are relevant to them.
The progress of your IHT205 application can be checked online.
It tells you what information is needed to provide to the probate office.
A copy of the online IHT205 form can be printed and paper trail kept.
There is online help and guidance to complete the details and helpful links to supporting information.
What does private beta mean?
This means that the service is not yet open to everyone. We chose to do this because it:
- gives us control over the audience that gets to use the service
- allows us to restrict the number of people that go through the service
- lets us start small and get feedback faster before rolling it out to a wider audience towards the end of the year
- allows us to help our early customers through the process of obtaining a grant
IHT treatment of usufructs
HMRC has been asked, following a recent article and other commentary, whether its approach to the treatment of a usufruct for IHT purposes which was outlined in the Newsletter of April 2013 has altered.
HMRC can confirm that its approach to the treatment of a usufruct remains as stated in the April 2013 Newsletter.
Since April 2013, HMRC has dealt with a small number of cases where the estate included a usufruct and in each case, the facts were less than straightforward. HMRC applied its approach to the facts of each case as it understood them to be, and in each case, the difference between the value reported by the taxpayer and the value that emerged following HMRC’s approach was not sufficient to warrant pursuit. So in accordance with its Litigation and Settlement Strategy, HMRC adopted the value reported by the taxpayer.
But HMRC remains of the view that, generally, a usufruct should be treated as giving rise to a settlement for IHT purposes and will pursue the collection of tax on that basis.
IHT403 and Normal Out of Income Exemption
If you want us to treat lifetime gifts made by a deceased person as normal expenditure out of income you will need to give us information about the deceased’s income and expenditure. We have designed page 6 of the form IHT403, ‘Gifts and other transfers of value’ so you can set out these details in a way we can clearly understand.
We have noticed that we are receiving an increasing number of forms IHT403 where:
- the deceased made gifts which may have been normal expenditure out of income
- page 6 of the form IHT403 is incomplete
- there is no separate schedule showing income and expenditure
If you want to deduct normal out of income (NOOI) exemption from the deceased’s estate, you must give details of the gifts on page 2 of form IHT403. You must also give details of the deceased’s income and expenditure during the period when the gifts were made by either:
- completing page 6 of the form IHT403
- sending us your own supporting schedule of income and expenditure
You should also send us any relevant documents. But, these should only be to support the details already given in the form IHT403 or separate schedule, and not as a substitute for them.
If you don’t complete page 6 or provide a supporting schedule it will take us longer to consider whether normal out of income exemption applies. We may also need to ask you further questions about the deceased’s income or expenditure if you don’t set these details out clearly.
Form 41G (Trust)
A new version of the 41G(Trust) form has been published and is now available on GOV.UK. The form has been rebranded and redesigned.
The content has not changed apart from 2 additions which we hope customers will find helpful:
a request to complete authorisation form 64-8 if a professional agent is acting together with a link to a copy of form 64-8 and supporting guidance.
Trusts and Estates Manuals
Moving our manuals to GOV.UK
You may have noticed that we haven’t made any amendments to the Inheritance Tax Manual and Trusts, Estates and Settlements Manual recently.
This is because HMRC is moving its technical manuals to the GOV.UK website over the next few months. To enable this to happen, we’ve had to hold back from making changes to the current versions - to ensure that they remain an accurate mirror of the versions used by HMRC staff. We are sorry for any inconvenience caused and will continue to keep you updated on progress.
Once the manuals have moved you should find it easier to give us feedback on particular pages and we should find it easier and quicker to make changes to them.