ICAEW responds to HMRC’s consultation
The Tax Faculty has responded to HMRC’s consultation on inheritance tax (IHT) simplification for trusts.
The consultation Inheritance Tax: Simplifying Charges on Trusts – the next stage was published on 31 May 2013. Our response is published as TAXREP 39/13.
The consultation looked at three areas:
- Simplification of IHT trust charges
- Accumulated income
- Alignment of filing and payment dates.
While we are broadly in agreement with the principles we are less supportive of the simplifications proposed.
The key proposal on the simplification of trust charges is to split the IHT nil rate band between all trusts set up by the settlor; this appears to be more of a revenue-raiser than a simplification. Our view is that this simplification will in fact add complexity, particularly to larger and long-standing trusts, as well as potentially increasing the tax charge. Both the standard rate band for income tax and the annual exemption for capital gains tax have a minimum allowance based on there being no more than five trusts in existence created by the same settlor; no such de minimis is included in this proposal. As trusts of negligible or nil value, such as life insurance trusts, will also be included, the proposals will result in higher and inequitable charges on trusts.
It is proposed that undistributed income be treated as capital after two years. But as many trusts are set up with the aim of providing help in the long term, income will frequently be saved “for a rainy day”. To have an arbitrary cut-off of two years will put tax and trust law at loggerheads. We do not agree with this proposal and the accumulation point should not be looked at in isolation within the IHT regime but considered in the round, looking also at income tax and trust law.
The alignment of filing and payment dates with the self assessment dates is a practical and welcome proposal, with the proviso that the filing date should be matched to the 31 January electronic filing date rather than the 31 October paper filing date.