Tax treatment of trusts for inheritance tax: new government proposals

HMRC has issued a third consultation document entitled ‘Inheritance tax: a fairer way of calculating trust charges’ on the inheritance tax regime for trusts. Two previous consultation documents have been issued. The first consultation document published in July 2012 was entitled ‘Inheritance tax: simplifying charges on trusts’. The second consultation document was issued in May 2013 and outlined possible changes that as well as simplifying the rules were also aimed at preventing what HMRC considered to be an abuse of the rules by the establishment of a number of separate trusts.

This third consultation document was issued on 6 June 2014 and goes further than the two previous documents in that it sets out specific proposals for new legislation and the timing of its introduction. It broadly adopts proposals contained in the last consultation document. More importantly, however, some firm proposals have been implemented and, subject to any changes made as a result of the consultation, will apply to new trusts created and property added to existing trusts after 6 June 2014. The changes will also apply to property in existing trusts, the terms of which are changed in certain ways on or after 7 June 2014.

The existing rules, which are the subject of the consultation, relate to trusts within the ‘relevant property’ regime. The number of trusts subject to the relevant property regime was greatly expanded by the changes introduced in 2006. Broadly speaking, all trusts are relevant property trusts for these purposes except trusts under which a beneficiary has an interest in possession (i.e. the right to the income) where that arose before 22 March 2006 and also where a beneficiary has such a right to the income in a limited number of other circumstances. When a beneficiary has such a right to the income, the trust capital is treated as owned by the beneficiary and liable to tax on their death or potentially where their interest comes to an end during their lifetime. Additionally, certain trusts for the benefit of minor children or children under the age of 25 under the will of their parent are outside the relevant property regime…

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