On 31 May 2013, H.M. Revenue and Customs ("HMRC") published a further consultation on the IHT regime for trusts. This includes a number of proposals intended to simplify the regime, but a by-product of some of the proposals is that the scope of tax planning available using trusts will be significantly reduced.

The IHT regime for trusts is known as the Relevant Property Regime. It affects the majority of trusts although certain categories of "life interest" trust and trusts for vulnerable persons are not caught by the rules.

The regime involves a charge to IHT at every ten year anniversary of the trust and when property leaves the trust. The maximum rate of IHT is 6% of the property subject to the charge. The regime has long been criticised because the calculation required to work out the applicable rate of tax is complex and onerous. Quite often, the professional costs involved for preparing the calculation outweigh the tax due.

The main aim of the consultation is to simplify the IHT calculation and this objective is welcomed. One of the proposals is that the nil-rate band (each person's IHT allowance, currently £325,000) will be split between the number of trusts that an individual has created. This will simplify the calculation as a complicated process is currently required to calculate the amount of nil-rate band that each trust is entitled to; however, the proposal will also affect the scope for tax planning using trusts.

At present, each trust that an individual creates effectively has its own nil-rate band, provided each trust commences on a different day. This makes it possible for an individual to have multiple trusts (often known as "pilot trusts"), and provided the value of each one for the purposes of the regime is under the nil-rate band, no IHT will be due. If HMRC's proposals go ahead, individuals will no longer be able to use pilot trusts for their tax planning.

Another proposal is that the rate of tax be fixed at 6%. This is intended to simplify the regime as it avoids the need to prepare a complicated calculation to arrive at the specific rate of tax for each trust at each chargeable event. However, many smaller trusts are currently subject to IHT at a lower rate than 6%, often as low as just 1%. Fixing the IHT rate at 6% will put such trusts at a significant disadvantage, and may deter many new settlors from using trusts at all. Trusts help individuals to pass assets down to the next generations of their family, and assist in supporting younger family members who are not yet responsible enough to manage large sums of money. Using unattractive tax charges to deter individuals from creating a trust is a trend that was started in 2006 when the Relevant Property Regime was extended to most trusts, and this latest proposal sadly adds a further blow.

The proposals are open for comments until 23 August 2013. We are expecting the proposals relating to the nil rate band and fixed 6% rate to be controversial and attract negative responses in the industry, but whether or not this will affect the proposals that will eventually be put before the Government, remains to be seen.

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