IHT for relevant property trusts

Background

Since 2006, most trusts created are now relevant property trusts. The inheritance tax (IHT) regime for relevant property trusts imposes an IHT charge on each ten year anniversary and when capital leaves the trust.

The calculation of the tax charge is complicated and HMRC have consulted on ways to simplify the calculation whilst protecting tax revenues. Unfortunately, it now appears there will not be any major simplification.

The limited range of trusts that are not relevant property trusts include:

Interest in possession trusts settled before 22 March 2006
Transitional serial interest trusts altered before 5 October 2008
Immediate post death interest trusts set up by a Will or the rules of intestacy
Disabled person’s interest trusts
Bereaved minor trusts
‘18 to 25’ trusts.

However, these are very specific types of trust which can only be created under limited circumstances.

BDO can help trustees review a relevant property trust prior to its ten year anniversary to ensure it is still meeting its objectives and also provide an estimate of the IHT which will be due. We also recommend that trustees contact us before making any capital distributions to beneficiaries to ensure they understand the tax consequences.

Same day additions to settlements

Finance Bill (No.2) 2015 implemented changes to treat relevant property trusts which receive additions on the same day as related. This effectively means that they share one nil rate band, for the purposes of IHT charges from 6 April 2015 onwards.

It is important that individuals review their Wills regularly to ensure that they continue to meet their needs in a tax-efficient way. Our IHT specialists can guide individuals through this process so that tax risks are recognised and where possible, minimised.

Retained income

Since 6 April 2014, when calculating the IHT due on a ten year anniversary, all income which has been in the trust for more than five years is treated as relevant property. While this provides certainty when calculating the IHT charge, it may result in a higher liability, and is another reason why every trust should be reviewed prior to its ten year anniversary.

Filing deadline and tax payment

The filing deadline for returns of ten year anniversary charges and all exit charges is six months after the end of the month in which the charge arose. The tax also falls due on the same date although for certain assets a claim may be made to pay the tax by ten equal annual instalments.

So, for example, for a chargeable event arising on 10 May 2023 the filing deadline and tax due date is 30 November 2023.

Enquiry periods

The time limits that HMRC have to assess tax when it believes that an error has been made depends on the ‘behaviour’ of the taxpayers and any persons acting on their behalf (eg the trustees). The time limits, taken from the later of the date the tax was paid and the date the tax became due, are as follows:

Normal time limit 4 years
Careless behaviour 6 years
Deliberate behaviour 20 years.

Filing penalties

These have not changed; however, HMRC is now applying them rigorously. The penalties for late filing are:

£100 initial penalty
A further £100 penalty where the account is filed more than six months late
Up to £3,000 where the account is more than 1 year late.

The penalty for an incorrect return is up to 100% of the potential lost tax. Interest of 7% (based on current HMRC rates) is also charged on late payments.

Next steps

The tax rules are complex but sensible use of trusts can still be of benefit to many families. For help and advice on how a trust can be used to help your family, please get in touch with your usual BDO adviser or contact Tim Lynch.

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