HMRC IHT & Trusts Newsletter – April 2008

Contents

Trusts

IHT

IHT & Trusts

Introduction

Welcome to the April edition of the IHT & Trusts Newsletter. If there are any issues you would like us to address in a future edition, please let our customer service team know at: Customer Service Team.

Dave Shaw
Head of IHT & Trusts

Self Assessment Trust and Estate tax returns

Where formal Self Assessment tax returns are required for a Trust or for the administration period of a deceased person’s estate, form SA900 should be used and not the SA100 version. The same principle applies to any supplementary pages that are required, ie the Trust and Estate pages (forms SA901, etc) should be used instead of the individual tax return pages (forms SA101, etc).

If the incorrect version is used it may not be possible to process the return and the form may be rejected. This may impact on tax returns not being filed on time and the taxpayer may receive a Fixed Penalty Notice.

If the tax is not paid on time the taxpayer may be charged interest and surcharges.

Settlor-interested trusts and income tax

In the December 2007 newsletter we outlined the rules introduced in 2006 for beneficiaries of discretionary settlor-interested trusts. We explained that income paid from such trusts came with a ring fenced notional tax credit of 40 per cent covering the income tax charged on that income in a beneficiary’s hands.

However, because under statutory ordering rules, income from a trust was charged before savings and/or dividend income, a beneficiary of such a trust who also had savings and/or dividend income may have found that the non-trust income was pushed into higher rates so that more tax was due overall.

Legislation has been included in Finance Bill 2008 which, subject to Parliamentary approval, will correct this by providing for income from a discretionary settlor-interested trust to rank above savings and dividend income. The amending legislation backdates the correct position to 6 April 2006. This will ensure that those affected are not disadvantaged by the omission.

Budget 2008: IHT highlights

The Budget 2008 included some announcements relating to IHT. Most relate to changes that were announced in the Chancellor’s Pre-Budget Report on 9 October 2007 (PBR 2007).

IHT nil rate band

The nil rate band rises to £312,000 for deaths and other chargeable events on or after 6 April 2008. Please remember that the limit for determining whether an estate can qualify as an excepted estate remains at £300,000 until 6 August 2008.

Transferable nil rate band (TNRB)

PBR 2007 announced proposals to allow the transfer of unused IHT nil rate band between spouse and civil partners where the survivor dies on or after 9 October 2007. The Finance Bill 2008 contains draft legislation to implement this measure. The Bill contains some extra measures to reflect issues that have arisen since PBR.

  • Where the transfer of unused nil rate band is accruing through an intervening death but no claim was made on that death, the personal representatives of the survivor will be allowed to include a claim to transfer unused nil rate band from the earlier death with their claim.
  • The interaction of these new provisions with a claim under Scottish law to 'legitim' has been clarified. Broadly, if a claim to 'legitim' is made after a claim to transfer unused nil rate band, HMRC has the power to adjust the latter claim to suitably reflect the impact of the legitim claim.
  • The existing rules under which values ascertained for IHT purposes apply for capital gains tax (CGT) purposes will be changed so that where a value is ascertained solely for the purpose of ascertaining the amount of TNRB, that value will not apply for CGT purposes.

Interests in possession in settled property: Transitional Serial Interests

The Budget contained a proposal to clarify the IHT position where a beneficial interest in possession (IIP) that arose before 22 March 2006 comes to an end and is replaced by another IIP for the same life tenant. This will ensure that no IHT charge arises where the replacement IIP qualifies as a Transitional Serial Interest (TSI). But IHT will be charged where the pre-22 March 2006 IIP comes to an end after the end of the (extended) transitional period to be replaced by an IIP for the same beneficiary in a relevant property settlement. The period within which a TSI can be created is to be extended to 5 October 2008.

IHT Penalties

FA 2007 legislated a single new penalty regime for incorrect returns for income tax, capital gains and other taxes. The Finance Bill 2008 contains legislation to extend those provisions and create a single penalty regime for incorrect returns across all the taxes, levies and duties administered by HMRC – and this includes IHT.

The proposals include a provision enabling HMRC to levy a penalty on a third party who deliberately provides false information to, or deliberately withholds information from, the taxpayer. In an IHT context, an example may be where the donee of a lifetime gift from someone who has died deliberately withholds information about the gift from the personal representative, causing them to deliver an incorrect account that understates the amount of IHT due. The amount of the penalty would be calculated in the same way as if payable by the taxpayer.

The new provisions will have effect from a date to be appointed by Treasury Order. It is expected that the new provisions will cover errors on returns for periods commencing on or after 1 April 2009 where the return is due to be filed on or after 1 April 2010.

IHT treatment of pensions

Unauthorised payments from registered pension schemes

Budget 2008 announces some minor changes to the proposals announced at PBR 2007, under which an IHT charge will arise following the death of a pension scheme member aged 75 or older who was entitled to an annuity or scheme pension, and there is either an increase in pension rights of other members of the scheme that is attributable to the death of the member or the subsequent payment by the scheme of an unauthorised lump sum. The changes announced at Budget will ensure that any nil rate band that has not been used against an individual’s estate may be used only once against IHT charges in respect of scheme pensions, annuities and alternatively secured pensions, where more than one of these charges arise. They also provide that the unauthorised payment charges and IHT will not have effect so long as at least 20 scheme members have their rights increased at the same rate because another member has died.

Overseas pension schemes

PBR 2007 announced that IHT exemption would be restored to UK tax-relieved savings in overseas pension schemes. The Budget extends that proposal to other funds saved in overseas pension schemes that are tax-recognised or regulated in their own country or that guarantee that the funds are used to provide a pension for life.

Applying for an IHT reference

As part of our preparations for the transfer of IHT banking from Nottingham to Shipley, we introduced a facility in October last year for you to apply for an IHT reference number online. This process is necessary only where there is tax to pay on delivery of the IHT200, and is required so we can send you a payslip.

Unfortunately, we are receiving a lot of applications for an IHT reference for estates where there is no liability. This is generating a lot of unnecessary work for us in setting up accounting records that are not needed and is diverting resource away from dealing with estates that do need our attention.

Please do not apply for a reference in an estate where there is no tax to pay – including where there is no tax to pay because of a claim to transfer unused nil rate band.

Please only apply for an IHT reference number where you are certain that there will be tax to pay on delivery.

Excepted transfers and excepted settlements

We would like to thank everyone who took the time to comment on our initial proposals for excepted transfers and settlements and on the draft regulations. We adopted as many of the suggestions as we could in the end product. You can find the regulations themselves at:

http://www.hmrc.gov.uk/si/2008-0605.pdf for excepted transfers

http://www.hmrc.gov.uk/si/2008-0606.pdf for excepted settlements.

The draft guidance for incorporation in the IHT Manual is at

http://www.hmrc.gov.uk/cto/iht/ets-draft-guidance.pdf

If you feel the draft guidance could be improved in any way, please email our Customer Service Team with your suggestions.

Notifying amendments to excepted estates

We receive around 20 letters a day from agents advising us about amendments to excepted estates. In virtually every case, the estate remains an excepted estate and so there is no need to contact us at all. This is diverting our resource away from dealing with estates that do need our attention and is a waste of time and money for both us and the taxpayer.

We only need to know about changes to an excepted estate if, as a result of those changes, the estate is no longer an excepted estate or there is a liability to IHT. Please only tell us about changes to excepted estates in these circumstances.

Transfer of unused nil rate band

The new process for claiming the transfer of unused nil rate band is very largely working well, and we have received around 2,500 cases already where a claim has been made. We want to draw your attention to a couple of points to ensure we can continue to deal quickly with your claims.

First, please make sure you provide all the documents listed on form IHT216 when you make your claim. It only delays matters if we have to write and ask for missing documents. They do not have to be the original documents or official copies; certified copies are acceptable.

Secondly, where the deceased’s spouse died before 13 November 1974, you should fill in boxes 6 and 7 of Form IHT216 so that

  • where the first death was between 21 March 1972 and 13 November 1974, you must include in boxes 6 & 7 the value of legacies and the share of any jointly owned assets that passed to the spouse, but only insofar as these exceed £15,000
  • where the first death was before 21 March 1972 you must include in boxes 6 & 7 the value of all legacies and the share of any jointly owned assets that passed to the spouse

Form D7 (notes)

Please note that there is an amendment to page 6 of the D7 notes. The note after the second paragraph should read 'net of income tax at basic rate', not 22 per cent as it currently states.

IHT Correspondence: help us to help you

We often find it hard to match up correspondence with our files because there is too little information on the letter.

If you have an IHT reference, please quote it – it will usually begin with 'F' or 'A' if it refers to a death and 'L' if it’s a settlor or transferor. Please also state the full name of the person whose affairs you are dealing with. An initial and last name is not usually enough for us to be able to trace a reference. If the event you are writing about is the death of a life-tenant, please state their full name and date of death as we may not have a file for the person who set up the trust in which they had an interest. This will all help us match the correspondence with the file more quickly and will mean we won’t have to phone you for further information just to find the reference.

Amendments to our Manuals

Details of changes to the IHT Manual and the Trusts, Settlements and Estates Manual are available at the 'Update' links on the HMRC website. You can find out from this link when a page has changed.

Since our last Newsletter in December, the following changes have been made to our manuals

IHT Manual

More examples have been included at page IHTM14333 of situations where the donor’s continued benefit from an asset given away is considered to be too insignificant for them to have made a gift with reservation.

Trusts, Settlements and Estates Manual (TSEM)

The pages dealing with the informal payments process have been renumbered from TSEM7425 through to TSEM7427.
A batch of revisions to the TSEM are due to be published shortly. A list of all the changes will be given at ‘Updates to this guidance’ at the start of the TSEM. But we would like to draw your attention to the main changes, which will be:

TSEM5357-5359 – Winding up a FURBS
TSEM5852-5858 – Direct Payment trusts
TSEM5952-5956 – the Thalidomide Trust
TSEM6045 – when a will trust commences