Budget 2014 – IHT & Trusts

Measures To Take Effect from April 2014

Nil Rate Band To Remain At £325,000

As announced in Budget 2013, the IHT nil rate band will remain frozen at £325,000.  This freeze is expected to last until April 2018.

 

Trusts With Vulnerable Beneficiaries

The range of trusts which qualify as “vulnerable beneficiary” trusts – that is, trusts established for the benefit of someone with a severe physical or mental disability, or for a bereaved minor child – will be extended from 6 April 2014.

Special tax treatments apply to these trusts.  The idea is to enable vulnerable people to have property safeguarded for their benefit within a trust, whilst ensuring at the same time that the tax consequences are the same as it would be if these people owned the property outright.

Disability Living Allowance (DLA) is being phased out for individuals of working age and being replaced with Personal Independence Payment (PIP).  Before April 2014, trusts only qualified as “vulnerable beneficiary” trusts if their sole or main beneficiary was in receipt of the middle or higher rates of DLA, or the daily living component of PIP.

The April 2014 change means that trusts will also qualify if their only or main beneficiary is a person in receipt of the mobility component of Personal Independence Payment, at either the standard or enhanced rate.

Assets in vulnerable beneficiary trusts now also benefit from the tax-free uplift in base cost, for capital gains tax purposes, which applies when someone dies.  Previously there was a requirement that the beneficiary should be entitled to income from the trust.  This change applies to all deaths from 5 December 2013 onwards.

 

Filing and Payment Dates For IHT – Trusts

IHT returns are needed for some trusts on every tenth anniversary, or at certain other times, for example when property leaves the trust (an “exit”) and IHT is due.  From 6 April 2014, the due date will be six months after the end of the month in which the anniversary or exit occurs.  The IHT payment deadline will be at the same time.  This measure is intended to align the filing and payment dates, which previously were more complicated to work out.

 

Accumulated Income – Trusts

Where trustees have the power or a duty to accumulate trust income, as well as a power to distribute this income, income can sometimes stay in the trust for a number of years before it is distributed to beneficiaries.  From April 2014, income which arose more than five years before a ten-year anniversary, but which has still not been distributed on the ten-year anniversary, will be deemed to be capital.  This means that the value of this income will be part of the ten-year IHT calculation.

However, this will only be for the purpose of the ten-year IHT calculation.  If the undistributed income is then paid out, it will not be subject to an “exit” charge.

In light of this change, trustees who have powers to accumulate and distribute income may need to review their distribution policy before the trust’s next ten-year anniversary.

 

Measures To Take Effect from April 2015

Exemption For Workers In The Emergency Services

The Chancellor announced an intention to extend the existing exemption from IHT, which currently exists for members of the armed forces, to members of the emergency services who die in or as a result of injury sustained in the course of their duties.  Legislation is expected in Finance Bill 2015 and a consultation period will now follow.

This exemption currently applies to members of the armed forces.  It also applies to members of the Police Service of Northern Ireland who die from injuries caused there by terrorist activity.

The existing exemption applies to their estate on death.  However, it does not cover gifts made in the seven years before death.  It also doesn’t cover tax which becomes chargeable on a trust fund as a result of someone’s death.

 

Simplification of IHT Calculations – Trusts

HMRC have been consulting on suggested ways to change the rate of tax for “exits” and ten-year anniversary charges of IHT on trusts.  This included a proposal to share the nil rate band between all relevant property trusts created by the same settlor, and another proposal to simplify the rate of tax on property exceeding the available nil rate band to 6% (reduced pro rata for periods of less than ten years).

It was announced in the 2013 Autumn Statement that there would be further consultation on these changes and that they would not take place until April 2015.

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Nov 19

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