HMRC are aiming to simplify the administration of inheritance tax (IHT) for trusts but there is a sting in the tail.
The changes proposed are designed to make the calculation of the ten yearly inheritance tax charge and any exit charges much easier, however in doing so they also considerably increase the inheritance tax payable.
At present all individuals are entitled to a inheritance tax nil rate band of £325,000. If you give away property to trusts during your lifetime the inheritance tax nil rate band refreshes every seven years. This means that you can set up a trust every seven years up to the value of £325,000.
However the proposals give each individual one settlement nil rate band “SNRB” they are requried to specify how this should be divided between all trusts that they establish from 6 June 2014 onwards.
The consultation document gives an example of a couple aged 40 who under exisitng rules could give £3.25 million to trust by the age of 75 free of inheritance tax. However under the proposed rules this would drop to a maximum of £650,000.
Whilst simplification is always welcome, it seems that the Government have once again ceased the opportunity to increase revenues at the same time. They do seem to forget that in most cases these days trusts are used for reasons other than tax. They are important tools for asset protection and family sucession planning.
The consultation period ends on 29 August and so it will be a while yet before we get to the conclusion of this..watch this space for further details.