INHERITANCE Tax is set for a rise after HM Revenue & Customs released proposals that could significantly increase the levy on trusts.
The changes are intended for introduction in April 2015, but to prevent any last-minute planning, it will be applied retrospectively to trusts set up from 6 June this year.
Currently, individuals are entitled to a nil-rate band, of £325,000, before inheritance tax (IHT) is chargeable. Where individuals give away property to trusts during their lifetime that nil-rate band refreshes every seven years. This means that an individual could effectively set up a trust, every seven years, up to the value of the nil-rate band; without any inheritance tax payable by the trustees.
Under HMRC's latest proposals each individual would be given one special settlement nil-rate band that would last their lifetime. Individuals would then decide how that nil-rate band should be divided between any trusts they establish. This will result in considerably more new trusts falling into the inheritance tax net, increasing the total inheritance tax payable by trustees.
In their consultation document, HMRC gives an example, to illustrate the point. Under existing rules a couple aged 40 could give away £3.25m to trust, by the time they reach age of 75, with no inheritance tax cost. Under the new rules this would drop to £650,000.
HMRC plan to ask trustees to self-assess their inheritance tax calculation. The consultation also proposes a new flat rate of six per cent for inheritance tax which is intended to make calculation of the 10-year IHT charge more straightforward.
These proposals are part of the ongoing HMRC consultation regarding the simplification of trust inheritance tax and was not announced at the time of the Budget. The government and HMRC are seeking views from those who use and are involved in the administration of trusts. HMRC state that consultation is ongoing and no final decisions have yet been taken.
Professional advice can help individuals establish their liability to inheritance tax and consider ways to mitigate. As with most areas of financial planning the sooner you start planning the better.
In connection with your financial affairs you should seek independent legal and financial planning advice. If you would like to discuss your situation in more detail, please contact OCM Wealth Management on 0845 338 1971