Bradford accountants warn on government clamp down on trusts

10 August, 2014

Bradford-based chartered accountancy firm Watson Buckle is warning individuals that HM Revenue and Customs is looking to clamp down on the use of multiple trusts to avoid Inheritance Tax (IHT).

HMRC has proposed a single “settlement” nil rate band to ensure the equivalent of a full IHT charge is paid on trust property once in every generation.

John Kinsella, tax partner at Watson Buckle, said: “If you have multiple trust funds you could soon see your Inheritance Tax (IHT) bills rise significantly.

“Taking effect from 6 April 2015, but applying to any settlement established or property added to a trust after 6 June 2014, the “settlement” nil rate band would last an individual’s lifetime.

“Currently a nil rate band of £325,000 is available to all individuals before IHT is chargeable. Where individuals give away property to trusts during their lifetime the nil-rate band refreshes every seven years. In principle that means that an individual could set up a trust up to the value of £325,000 every seven years, with no IHT payable by the trustees.

“The new IHT regime will mean that individuals will have to specify how the nil-rate band would be divided between any trusts they establish.”

Under the new rules many trusts that were previously IHT free would fall into the tax net, increasing the total IHT charge payable by trustees.

HMRC has also recently denied that plans to tackle tax avoidance schemes involving IHT will result in taxpayers having to make disputed payments upfront before they die.

“A consultation document issued at the end of July by HMRC had indicated that the authority intends to broaden the range of schemes involving IHT which are subject to the disclosure of tax avoidance schemes (DOTAS) regime,” added John.

“An individual or company using a scheme which has been disclosed under DOTAS could be subject of an Accelerated Payment notice, where the taxpayer would be liable to pay any disputed tax upfront. In the case where a taxpayer uses a trust to reduce or avoid IHT, this could mean paying up before they die.”

However HMRC have said that Accelerated Payment notices would not apply more widely to IHT trust charge changes, unless the trust arrangement is part of a tax avoidance scheme disclosed under DOTAS.

There is not right of appeal against Accelerated Payment notices, however a recipient has 90 days from the receipt of the notice to send written representations objecting to the notice to HMRC but only on the grounds that the conditions for the notice were not fulfilled – e.g. the scheme was not a DOTAS scheme or that the amount of the accelerated payment claimed is incorrect.

There are penalties if you fail to pay the Accelerated Payment within 90 days of the issue of the notice.