IHT – HMRC proposes just one Nil Rate Band for lifetime transfers

HM Revenue & Customs has recently released proposals which could significantly increase the IHT levy on trusts. The proposals will, if introduced, apply from April 2015 but anti-forestalling measures will back-date their application to any transfers into trust from June 6, 2014.

Presently the nil rate band (£325,000) is available for lifetime transfers into trust, and effectively “refreshes” or “re-sets” every seven years. As such, wealthy individuals can set up a succession of transfers into trust each seven years and legally avoid significant sums of IHT on eventual death, since they have moved that value out of their taxable estates.  In an example, HMRC state “(currently) a couple aged 40 could transfer property into a separate discretionary trust every seven years (£3.25 million by age 75 assuming the nil-rate band remains at £325,000) saving £1.3 million in IHT. In this scenario the next generation avoids any IHT charges altogether because of the previous generation’s use of multiple nil-rate bands.” This is considered undesirable by HMRC.

The proposals would give each individual one special ‘settlement nil-rate band’ that would apply during their lifetime, which would be divided between any trusts they establish (as specified by them as settlor). There would be no “refresh” of the nil-rate band every seven years, thus in a stroke the proposals would significantly reduce the IHT savings that are available currently.

The industry was expecting HMRC’s further  consultation document on the simplification of taxation of trusts, but this extra innovation was not anticipated. HMRC stress that these proposals are only in the consultation stage, but it is a worrying development for high net worth people who are concerned about inheritance tax.

The full HMRC consultation document can be found on HMRC’s site here.