Inheritance tax rise to be brought in ‘by back door’ – EY

INHERITENCE TAX is set for a rise after HM Revenue & Customs released proposals which could significantly increase the levy on trusts.

The changes, intended for introduction in April 2015, will be applied to funds from 6 June this year.

At present, all individuals are entitled to a nil-rate band – currently £325,000 – before inheritance tax is chargeable. Where individuals give away property to trusts during their lifetime that nil rate band refreshes every seven years. This means that an individual could effectively set up a trust up to the value of the nil-rate band every seven years and there would be no inheritance tax payable by the trustees.

However, the latest proposals would give each individual one special ‘settlement nil-rate band’ that would last for their lifetime. Individuals would then specify how that nil-rate band should be divided between any trusts they establish. This will result in considerably more new trusts falling into the inheritance tax net, increasing the total inheritance tax payable by trustees.

HMRC gives an example in the consultation document to illustrate the point. Under existing rules a couple aged 40 could give away £3.25m to trust, by the age of 75, with no inheritance tax cost. Under the new rules this would drop to £650,000.

At the same time HMRC intends to ask trustees to self-assess their inheritance tax calculation. The consultation also proposes a new flat rate of 6% for inheritance tax which is intended to make calculations of inheritance tax charges more straightforward.

EY private client tax partner Carolyn Steppler said: “This change has been announced as part of an ongoing consultation regarding the simplification of trust inheritance tax and was not announced at the time of the Budget.”

An HMRC spokesman said:”As announced at Budget 2014, the government is seeking views from those who use and are involved in the administration of trusts. This is an ongoing consultation and no final decisions have yet been taken.

“Should these changes be implemented couples would still be able to leave up to £650,000 tax free to benefit their children or grandchildren.”

 

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