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HMRC internal manual

Inheritance Tax Manual

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HM Revenue & Customs
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Relevant property: treatment of income after 6 April 2014

The treatment of income that has not been converted to capital is different where a ten year charge arises on or after 6 April 2014. In order to provide greater certainty in the treatment of income held by the trustees, amendments to IHTA84/S64 & IHTA84/S66 were introduced by FA14/S117 and FA14/Sch 25 para 4.

The broad effect of these provisions is that income which has not been distributed or converted to capital, and has been held by the trustees for more than five years, is to be treated as relevant property for the purposes of the ten year charge. The amendment to IHTA84/S66 means that tax is charged at the full rate, without any adjustment for the length of time the income has been held by the trustees.

IHTA84/S64(1A) identifies the income concerned as income which:

  • is income of the settlement,
  • arose more than five years before the ten year charge,
  • has arisen (either directly or indirectly) from property comprised in the settlement that was, when the income arose, relevant property, and
  • when the income arose, no person was beneficially entitled to an interest in possession in the property from which the income arose.

There are two relaxations from this general position. These are where

  • the settlement was made by a person who was not domiciled in the UK at the time the settlement was made and the income is represented by

    • property which is situated outside the UK, IHTA84/S64(1B)(a), or
    • a holding in an AUT or OEIC, IHTA84/S64(1B)(b).
  • the income is represented by exempt gilts and it is shown that all the beneficiaries who could ever become entitled to the capital or income from the settled property meet the condition for residence and domicile specified in the issue of the Treasury stock concerned, IHTA84/S64(1C).

IHTA84/S66(2A) disapplies IHTA84/S66(2) - which allows for a reduced rate where property has not been relevant property throughout the preceding ten years - for income that is treated as relevant property under IHTA84/S64(1A), so that tax is charged as regards such income at the rate given by IHTA84/S66(1).

In most cases, there is no need to conduct a forensic examination of transactions through the income account. In determining whether any income is to be treated as relevant property under these provisions, it will normally be sufficient for trustees to take the balance on the income account immediately before the ten charge year arises and deduct from that amount, the income that has arisen during the five preceding years. Any balance on the income account is to be treated as relevant property.

If the trust’s accounting period does not match with the anniversary of the trust, you may accept a sensible and reasonable approach to allocating income to the five year period immediately before the ten year charge (which will escape the charge). Where income has been distributed, again, you can follow the trustees’ approach and unless it is clear that a specific part of the income has been distributed, a ‘first in, first out’ approach is acceptable.

For the avoidance of doubt, IHTA84/S64(1A) is not limited to just the ten year period before each ten year charge. All income which arose more than five years before any ten year charge is treated as relevant property and will include income that arose at any time before the previous ten year charge. If such income has not been distributed by the time the next ten year charge arises, you should treat it as relevant property for the purposes of that charge.