IHT & Trusts Newsletter - December 2007

Contents

IHT

Trusts

Introduction

Welcome to the second edition of our joint IHT & Trusts Newsletter. If there are any issues you would like us to address in a future edition, please email our Customer Service Team.

Dave Shaw
Head of IHT & Trusts

Transferable nil rate band

The Chancellor’s Pre-Budget report proposed changes to IHT whereby spouses and civil partners can transfer any part of the nil rate band (NRB) that was not used when the first spouse or civil partner died to the survivor, so that the survivor’s estate can benefit from an increased NRB on their death. Subject to the approval of Parliament in due course, these new rules are to apply where the survivor dies on or after 9 October 2007.

Applying for IHT references

On 5 November 2007 we introduced a change to our process that requires all taxpaying estates to obtain an IHT reference before sending form IHT200 to us. This change has gone relatively smoothly, but in case you have not yet used the new process, this is set out below. Please also follow this process, with the appropriate form of account/affadavit, where the death occurred before 18 March 1986.

The new process is a little different from that which applied for the Direct Payment Scheme. We now recommend that around 3 weeks before you expect to deliver the IHT200 to us you should apply for your IHT reference number. There is a new on-line service for this which is available 24 hours a day.

You can now apply for a reference at any time, rather than during normal office hours only, as was the case with the telephone service. If you cannot use the on-line service you can apply by post using form D21. Form D21 can be downloaded from the Forms page.

Please note we have discontinued the telephone service as this did not provide us with a secure means of identifying both the deceased and the applicant(s). An application in writing, whether through the on-line route or by paper, will enable us to keep any inconvenience resulting from data-entering errors to a minimum.

Whichever method you choose to use, we will send by post a note of your new reference, a payslip and a payment envelope. You can then arrange to pay any tax due using the Direct Payment Scheme, at a bank, using electronic banks transfers (BACS/CHAPS) or by cheque. If you choose to send us a cheque please use the payment envelope provided, and remember to include the payslip (and nothing else).

When you send us the completed form IHT200 please remember to make a clear note of your new reference number on the top of the front page. This will help to avoid a delay in issuing your D18/C1.

When excepted estates are no longer excepted estates

Where it transpires that an estate no longer qualifies as an excepted estate, the personal representatives are required to deliver an account of the estate. Rather than insist on a full IHT200 being delivered, we will accept a Corrective Account (C4) that is accompanied by a copy of IHT205 (C5 in Scotland) as delivery of an account. Please be sure, therefore, to send a copy of the IHT205/C5 with your Corrective Account in these circumstances.

It is for this reason that our guidance recommends that you should keep a copy of form IHT205/C5 and we urge you to make keeping a copy of this form your normal practice.

Excepted estates and exemption under paragraph 2 schedule 6 IHTA 1984

Para 2 sch 6 provides that the value of a life interest may be left out of account in certain circumstances in establishing the value of an estate on death. Nevertheless, the settled property must still be taken into account in establishing whether or not the estate can qualify as an excepted estate. Where the settled funds exceed £150,000; or the deceased has more than one life interest, the estate cannot qualify as an excepted estate.

Where an estate qualifies as an excepted estate, there is no need for trustees to contact us for confirmation that the exemption applies. Once the statutory period has passed, the discharge contained in the excepted estate regulations will apply to all titles.

Where an estate cannot qualify as an excepted estate we will not issue 'clearance' as there are no assets in charge. If trustees want confirmation that the exemption applies, they should write to us with full details of the trust and enclose a copy of the document setting up the trust and a copy of the grant of representation for the settlor’s death.

This process should also be used where the estate does qualify as an excepted estate but the personal representatives do not intend to apply for a grant of representation. As there will be no grant there is no event to trigger the statutory discharge. We will not issue 'clearance'; but we will advise whether or not the exemption applies on receipt of the information and documents requested above.

Conditional exemption and national heritage matters

We have made a number of changes recently to our procedures for dealing with matters that relate to conditional exemption from IHT and national heritage matters generally.

IHT and the valuation of property owned jointly by spouses or civil partners

Published on 28 November as:

Valuation of real and leasehold property

We have noted an increasing number of claims that real or leasehold property in an estate should be valued at less, often substantially less, than the full open market value. Many of these claims are based on the assertion that someone, usually a family member, has a beneficial interest in the property where their name is not on the legal title. In the recent House of Lords decision in Stack v Dowden [2007] 2 All ER 929 Baroness Hale of Richmond, who gave the leading judgement, commented, at page 953b that

“The burden will therefore be on the person seeking to show that the parties did intend their beneficial interests to be different from their legal interests, and in what way. This is not a task to be lightly embarked upon”,

and also, at page 953c,

“In joint names cases [a full examination of the facts] is also unlikely to lead to a different result unless the facts are very unusual”.

It is clear from Baroness Hale’s judgement that, similarly, in cases where there is a single legal owner of the property the onus is upon the non-legal owner to show that they have any interest at all in the property, (page 948f). In the light of these comments, we would ask practitioners to consider all the facts carefully before making a claim of this nature on behalf of their clients. If, having done this, practitioners wish to contend that there is a valid claim in law; we would expect to receive a full and detailed account of those facts together with all the relevant evidence, as if the claimant were presenting the claim to a court of law. The need for careful scrutiny of all the facts and circumstances, including the availability of relevant evidence before a claim can be made, was highlighted by these remarks from Walton, J in Re Gonin (deceased) [1977] 2 All ER 720

"………all claims against the estate of a deceased person which had not been put forward whilst they were still living, fall to be scrutinised with considerable care, for the obvious reason that the other party to the agreement is in the nature of things unable to give his or her version of events……”.

In the light of the above judicial authority, unless there is a case that we consider sufficiently strong that it would be upheld by the courts, the claim will be rejected.

Relief under section 179 IHTA 1984 for loss on sale of shares

Special dividends and 'returns of value'

Under section 181(1) IHTA 1984, loss on sale relief is restricted, in broad terms, by the amount of any capital payment received in respect of qualifying shares that are sold within 12 months of the death. Section 181(3) IHTA 1984 makes it clear that capital payment is money or money’s worth that is not income for income tax purposes.

When we check claims made on IHT35 for section 179 relief, our processes aim to identify shareholdings where large payments have been made. But our information sources do not always indicate whether or not the payment is a capital payment within the terms of section 181(3). As a result, we may challenge or query some claims for relief which have been correctly made. To minimise this, it would help us if you included as part of the claim a separate note identifying any significant receipts of money that are income for income tax purposes. Such receipts might be identified by the paying company as a “special dividend” or, as a part of a scheme to return 'value' to shareholders, a one-off payment (often referred to as 'the Single Dividend Alternative').

We intend to revise the text of the IHT35 when it is next printed to include this information request.

Reporting requirements for lifetime transfers and trusts

Earlier in the year we published details on the HMRC website about how we proposed to revise by regulations the IHT reporting requirements for lifetime transfers and trusts in the light of the Finance Act 2006 changes, and invited comments on those proposals. We have been reviewing the proposals in the light of the comments we received, and we will be publishing draft regulations as soon as possible.

IHT Presentations

From time to time we are asked to give a presentation on an IHT-related topic. When we consider such requests, we need to ensure that we will be using our resources as efficiently as possible for taxpayers as a whole. So it is unlikely that we will agree to many requests for speakers for presentations and conferences. But we would certainly not rule out meeting a request that gave HMRC Inheritance Tax an opportunity to deliver to a large and representative audience messages that are important from the point of view of our business.

If you would like us to give a presentation on an IHT-related topic please email the IHT Customer Service Team, providing full details of the event, including the topic required, size and make-up of the audience and preferred date and location. This information will enable us to fully consider the balance of benefit and reach an early decision.

Trust & Estate Tax Return – changes to Self Assessment filing

There are some important changes to the rules concerning the Trust & Estate Tax Return (SA900). They will apply to the 2007-08 return and later years. The main changes are:

  • different filing dates for paper and online returns
  • the withdrawal of all substitute returns, and
  • linking the enquiry window (the period in which HMRC can open an enquiry into a return) to the date the return is delivered.

These changes are part of a wider programme announced in the 2007 Budget and have come about following the publication in March 2006 of the Review of HMRC Online Services by Lord Carter of Coles. The aim is to increase the use of HMRC's online services, promote earlier filing and provide customers with certainty sooner.

Tax payments in trust Cases

Where an SA return is filed by 30 September the responsibility for calculating the tax payable lies with HMRC. Where the return is filed after that the responsibility for calculating the tax payable, and paying the right amount on time, lies with the taxpayer.

There should be no expectation that HMRC will confirm the amount due in advance of the appropriate due date, even if the taxpayer or their representative requests some assurance that their calculation is correct. The fact that such a request has been made prior to the due date, but HMRC has not responded, does not mean that the taxpayer should delay payment of the tax they have calculated beyond the due date. Late payment will usually result in a surcharge becoming payable, and appeals against surcharges on the grounds that the taxpayer had been awaiting confirmation from HMRC of the amount of tax due will not be accepted except in highly unusual circumstances.

In itself the fact that confirmation of the tax due had been requested from HMRC, and not supplied, does not satisfy the criteria for an appeal on the grounds of reasonable excuse. Agents should therefore note that for returns filed after 30 September it is essential to ensure that payment of the tax calculated by them is made by the appropriate due date.

Agent Authorisation and Form 64-8 in Trusts and Administration Period cases

In August 2006 HMRC updated its guidance and procedures relating to the authorisation of agents to act for and receive information on behalf of customers. This update included the adoption of the form 64-8, which had been the agent authorisation form for the Inland Revenue, as the standard form for the purpose in HMRC, with suitable revisions. HMRC Trusts has recently looked more closely at the operation of these procedures in relation to trusts and deceased estates, and this article sets out a number of key points for agents and solicitors to bear in mind in this context.

HMRC has a strict legal duty of confidentiality in respect of the information we hold on our customers. The unauthorised disclosure of this information is a criminal offence. We cannot risk divulging information to anyone for whom we have not received the appropriate authority from the customer. Agents acting for trusts and estates should therefore note that our staff are not permitted to discuss anything with them in relation to a customer, whether in writing or by telephone, unless the customer has provided the necessary authorisation. Please respect this rule, and do not ask our staff to discuss cases with you when they are not authorised to do so.

There may be some cases in which there has previously been direct communication between HMRC Trusts and an agent, where the relevant authorisation has not in fact been supplied. Where this comes to our attention we will inform you that we have discovered no authorisation exists, and invite you to supply it. But in the meantime we will be unable to discuss the details of the case with you, despite the fact that we have done so previously.

Form 64-8 was the agent authorisation form for former Inland Revenue business. It provided written evidence from the customer to allow an agent to act on their behalf and to allow the Department to disclose confidential information to that nominated agent. The form was provided as an administrative convenience. As an alternative, agents could let us have the written consent in a letter. This continues to be the case in HMRC, but the form 64-8 has been redesigned to take account of the department’s wider remit.

The redesign allows the customer to specify exactly which matters they want the authorisation to cover; they have a choice of individual, trust or partnership affairs (including SA, PAYE for individuals and National Insurance), Corporation Tax, PAYE for Employers, Tax Credits and VAT. Administration Periods (i.e. deceased estates) are not specifically covered on the redesigned 64-8 however, so it will usually be easiest for customers to supply authorisation in the form of a letter, as indicated below.

Form 64-8 is normally used when there is a paid tax adviser. Customers do not have to use the form 64-8 to notify us that an agent is acting on their behalf. Whilst the authorisation must be in writing, they can put the details in a letter. The letter should contain all the details set out on form 64-8 and, in particular, in what capacity the agent is acting.

Please note that an authorisation given for an agent to act in one capacity does not extend to another capacity. For example, if you have authority to act on behalf of a trust this does not mean that we are permitted to discuss the affairs of the settlor with you. In particular you should note that where a customer asks HMRC to deal directly with a solicitor for the purposes of IHT (usually by completing section C of the form IHT 200), this does not provide satisfactory authorisation in relation to the Period of Administration.

A new online service was launched in November 2005. It allows agents to set up authorisations for the majority of their clients without the need for submitting paper forms 64-8. Agents can still use the paper forms but we would prefer they use the online service. The service allows agents to use the internet to set up authorisations for trusts.

Settlor-interested trusts and income tax

A ‘settlor-interested’ trust is one with a living settlor where the settlor, settlor’s spouse or settlor’s civil partner retains an interest in the trust. This will usually be one where there is no specific exclusion clause preventing any of these from benefiting from the trust. The trust itself can be accumulation/discretionary or interest in possession.

In the Finance Act 2006 there were some changes to legislation in ICTA 1988 (now in the Income Tax Act 2007) and ITTOIA 2005 concerning settlor-interested accumulation/discretionary trusts.

We have received a few queries from agents that suggest there is some confusion about how these new provisions operate. What follows is a guide to the new provisions. The other rules about settlor-interested trusts remain the same.

Guidance – 'What to do about tax when someone dies'

This guidance will help you understand the tax liabilities that may arise when someone dies. It gives basic information about income tax and capital gains tax and briefly mentions IHT. It also explains what you need to do if you are a personal representative or a beneficiary or a trustee.

For customers who do not have internet access, you can request a printed copy of the guidance by telephoning the Deceased Estates helpline.