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In association with
SUCCESSION TAXES VOICE Issue 01 – April 2016
Succession Taxes Voice | Issue 01 | April 2016 2
Welcome ................................................................................................................... 3
The non-dom conundrum?........................................................................................ 6
Edward Emblem addresses the question: How does one go about long-term tax planning when a tax change has
been announced but the details are yet to materialise?
Loans and Debts ........................................................................................................ 8
Gary Heynes and Kristina Volodeva consider the various issues surrounding the use of loans and debts in estate
planning for non-UK domiciled individuals and the impact of recent changes in the area
Business Inheritance tax and trusts: where are we now ......................................... 11
Harriet Brown provides an answer to the question so many have asked
Residence Nil Rate Band: an outline ....................................................................... 14
Allan Holmes guides us through some key issues regarding the Enhanced Nil Rate Band for residential property
Your new Succession Taxes Voice ........................................................................... 17
Consultations and submissions ............................................................................... 18
Events ..................................................................................................................... 20
Contact us ............................................................................................................... 21
Succession Taxes Voice
Issue 01 – April 2016
CONTENTS
Succession Taxes Voice | Issue 01 | April 2016 3
WELCOME
A little less voluntary
Former Chancellor of the Exchequer, Roy Jenkins, famously said that “Inheritance
tax is a voluntary levy paid by those who distrust their heirs more than they dislike
the taxman.” Like him or not the taxman now seems determined to do something
about reducing the voluntary aspects of IHT. Of course IHT was never truly
completely voluntary but for many years it sat undisturbed in its own sheltered
little backwater, largely undisturbed by the gathering storms of anti-avoidance
measures, contributing barely one per cent of the national tax take, and the
authorities seemed content to let it lie there. But then came the increases in
property values of the nineties and noughties, leading to calls for the nil-rate
band,which had also been neglected, to be increased in line with house price
inflation, rather than RPI or CPI. Perhaps this rang a small bell in the Treasury: if
enough taxpayers were concerned about paying more IHT there must be more IHT
to be collected and as the appetite for IHT avoidance arrangements grew so did
Government’s hunger for a slice of the cake. The first sign of a shift came with new
anti-avoidance measures in the mid noughties with counter measures against
purchased interests in excluded property trusts of thesort covered in Edward
Emblem’s article. Then came the pre-owned assets tax- POAT, designed to stem the
tide of arrangements designed to save assets, mainly private residences but
investments too, being shifted out of individuals’ estates while remaining available
for their benefit – but a benefit falling outside the gift with reservation of benefit
provisions. And despite the efforts (best or worst- opinion is divided and the CIOT is
neutral) of tax planners, the Government’s IHT ‘take’ continued to grow in cash
terms and as a proportion of total revenues.
Then the penny, or krugerrand, dropped: if IHT was worth avoiding by those
minded to, yet still turning into a money-spinner too, maybe it was time to get
serious about ramping-up enforcement. Throw in a desperate need to raise
revenue outside the restrictions of tax-locks and a political climate hostile to non-
doms, tax avoidance and in particular tax-avoiding non-doms and the time was ripe
for some serious moves to increase the IHT take.
Brian Slater Chairman Property Taxes Sub-Committee
Chris Williams Chair, Succession Taxes Sub-Committee Chris is the Private Client Technical Officer at Mazars LLP. Chris is a technical writer and adviser on all aspects of private client work and can be contacted at [email protected] or by telephone: +441512372213
Succession Taxes Voice | Issue 01 | April 2016 4
The changing landscape
Changes in recent years include:
curtailment of the usefulness of loans in IHT
planning, as dealt with by Gary and Kristina;
ending the long-recognised anomaly that
allowed a settlor to create multiple ‘pilot’
trusts, each with its own nil-rate band – see
Harriet’s article;
further tightening of the deemed domicile
rules by aligning them with income tax and
capital gains tax in a new common deemed
domicile régime which will diminish the
attraction of excluded property trusts,
covered by Ed; and
the tight constraints on the new residence nil-
rate band which, as Allan’s article makes
clear, is not as simpleas the increase in the
IHT threshold it is made out to be.
DOTAS – the hallmark of a tax taken seriously
Finally we have the full extension of the now long-
established disclosure of tax avoidance schemes
(DOTAS) rules to IHT.
IHT avoidance schemes involving confidentiality
clauses or premium fees have been within DOTAS
since 23 February this year and a further hallmark
would have been brought in too, but for the fact that
in its forst proposed form it was rejected as too wide-
ranging and unfit for purpose. In its original form its
scope could have treated simple gifts, the simplest of
plain vanilla transactions, as potentially notifiable
under DOTAS. Fortunately, HMRC has listened to the
criticisms of that hallmark and largely abandoned the
most contentious aspects of the new hallmark but
although the new proposals in the consultation
documenton disclosure of tax avoidance schemes for
indirect taxes and IHT (http://tinyurl.com/condoc-tax-
avoid), issued on 16 April 2016,demonstrate a better
understanding of the issues in IHT, they are still
attracting criticism due to the breadth of their
potential scope which could still, unless carefully
managed and more clearly defined, result in some
plain vanilla arrangements being brought into DOTAS.
Estate planning is more tutti frutti than plain vanilla
To a certain extent the problems presented by IHT
derive from the structure of the tax and the
arrangements potentially affected. IHT is the tax with
the longest lead time between arrangements being
made and taking effect: a will may be signed and then
forgotten for decades, in which time both the make-
up of the estate it governs, and tax law may change
out of all recognition before the testator dies, while a
trust can have a lifespan of up to 125 years under the
present perpetuity rules.
The DOTAS conditions and how they will be applied
Turning back to the changes being made to the
hallmarks, the following observations may be made:
Condition 1 “the main purpose, or one of the main
purposes, of the arrangements is to enable a person
to obtain a tax advantage” is uncontroversial in the
present day and age.
Condition 2 “the arrangements are contrived or
abnormal or involve one or more contrived or
abnormal steps without which a tax advantage could
not be obtained” is largely based on the
Government’s original proposal for Condition 3 with
some wording changes (the contentious original
Condition 2 having been dropped altogether). How
Condition 2 will apply will depend on how HMRC and
the Tribunals interpret the phrase “contrived or
abnormal”. “Contrived” connotes artificiality and so
may be thought of as less contentious than
“abnormal” but both words have a breadth of
meaning that extends far beyond tax. In the realm of
Succession Taxes Voice | Issue 01 | April 2016 5
succession planning it can be more difficult to pin
down what is normal than what is not as testators and
settlors of trusts are often more concerned with
retaining control over assets for reasons that, as the
late Mr. Jenkins observed, have nothing to do with
personal benefit but reflect their creators’ wishes to
protect future generations interests, the integrity of
particular property such as estates, in the real
property sense of the word, and the devolved assets
themselves from the depredations of rogues and the
feuds and follies of the beneficiaries.
Therefore wills and trusts may often contain
provisions that are contrived or abnormal for non-tax
reasons but which may lead to a tax advantage. The
weakness of the proposed Condition 2 is that it
contains no hint of a purposive test, i.e. that to the
informed observer the steps:
are contrived or abnormal;
contribute to a tax advantage being
obtained; and
have the avoidance of tax as the sole, or a
main purpose.
The informed observer test
The hallmarks depend on arrangements appearing to
an “informed observer” to meet the conditions.
HMRC’s view is that an informed observer is someone
who is independent and has knowledge of the Taxes
Acts “such as the Tribunal”. But this is not enshrined
in the proposed statutory instrument and so there is
no guarantee that in future HMRC’s interpretation
might not suffer from mission creep.
What is needed is that the “contrived or abnormal”
test be qualified in the regulations by restriction to
the context of IHT.
‘Ordinary’ tax planning
However, there is, at least, clear acknowledgement in
the revised consultation document that ‘ordinary’ tax
planning arrangements will not need to be disclosed,
with a few examples cited and the promise of high
level examples being given in the revised DOTAS
guidance to add clarity. It is explicitly stated that tax
planning arrangements whilst making or amending a
will (e.g. gifts into trust to use up the nil rate band of
the settlor) do not need to be disclosed. Neither, for
example, should outright gifts which use statutory
reliefs, or an investment decision which takes into
account the availability of business or agricultural
property relief, provided there were no contrived or
abnormal steps to secure those reliefs.
A number of common arrangements will also be
specifically excepted from the disclosure requirement:
loan trusts
discounted gift scheme
flexible reversionary trusts
split or retained interest trusts.
In contrast, disclosure will be required for home loan
schemes, where donors give away the family home
whilst retaining a benefit, as this is likely to breach the
gift with reservation of benefit rule.
When will the results be known?
The consultation closes on 13 July 2016 and will then
lead to amendments to the DOTAS Hallmark
Regulations. Therefore they do not depend on
Parliament being in session and may appear during
the Summer Recess. In the past changes to DOTAS
regulations have been issued as soon as they were
ready as they are not tax year-specific.
Chris Williams
Successions Tax Sub-Committee Chair
Succession Taxes Voice | Issue 01 | April 2016 6
THE NON-DOM
CONUNDRUM?
Edward Emblem addresses the question: How
does one go about long-term tax planning when
a tax change has been announced but the details
are yet to materialise?
We only currently know some of the measures
affecting non-doms due to be introduced from April
2017, but some individuals are keen to know now
how they should plan for the new regime in the long
term.
What has been produced to date still represents only
fragments of the necessary legislation. We are far
from having answers to a whole number of questions
around how the affairs of many individuals will be
affected from next April. What, then, can be done in
the meantime to protect family wealth and secure the
best position in light of the little we know?
Areas of reasonable certainty
Draft legislation has been published detailing the new
deemed domicile rules for income tax and capital
gains tax that will now appear in Finance Bill 2017
rather than 2016, potentially giving scope for
amendments in the interim. The clauses as currently
drafted mean that individuals born in the UK with a
domicile of origin in the UK who return to the UK will
be deemed domiciled, and therefore unable to access
the remittance basis from the year of return. All
individuals will be deemed domiciled once they have
been resident in the UK for more than 15 out of the
previous 20 years.
The 15 year rule will also apply for IHT deemed
domicile, in some cases, significantly accelerating the
point at which individuals will become IHT deemed
domiciled. Take as an example, Henrik, a non-
domiciled individual who was tax resident in the UK
for twenty years before recently having spent a period
of five years overseas. He has now returned and
thinks he will not have to worry about his overseas
assets coming within the scope of UK IHT for years.
Clearly, it may well be that he will now only have a
year before his worldwide estate becomes potentially
exposed.
Many of the usual planning tools will still be available
for those due to become deemed domiciled, with
excluded property structures still expected to retain
their merits for IHT purposes other than for UK
residential property. Whilst there is still uncertainty
around the taxation of offshore trusts under the new
rules, UK resident excluded property settlements may
be of interest to some. Pensions, offshore bonds and
family investment companies will all still be worth
considering and, may offer not only IHT protection,
but also help counter income tax and CGT
disadvantages where the remittance basis is no longer
available from 2017.
Some of those who will become deemed domiciled
from April 2017 may be able to arrange for foreign
income to be received prior to that date whilst they
are still taxed on the remittance basis. Taking
dividends from non UK companies, terminating
offshore deposits, selling offshore deep discount
securities or bonds heavy with accrued interest may
all be on the list of possible options. Every case will
need to be judged on its merits.
It is worth noting that individuals such as Henrik, who
recently spent five tax years abroad, may have a
limited period in which they can spend only a single
year overseas and in doing so, effectively restart their
domicile clock for tax purposes.
Succession Taxes Voice | Issue 01 | April 2016 7
Less certain areas
We have multiple assurances that there will be some
form of rebasing for those who find themselves
deemed domiciled from April 2017. This should give
comfort for many, depending on exactly how the
measure works. Some will find themselves in a
position where the IHT advantage of settling assets
into trust prior to April 2017 will have to be weighed
against the potential loss of CGT uplift. Other
countries’ taxes may, as ever, need to be considered.
Assurances have also been given that protection will
be available where an offshore trust has been settled
before the point of becoming deemed domiciled, with
the effect that income and gains within the trust will
remain untaxed unless paid out to a UK resident
beneficiary. Such trusts could theoretically be a useful
vehicle for the future tax-efficient accumulation of
wealth if the individual or their family intend to be
non-UK resident at the point they receive a future
benefit or if a benefit is taken later in life, which may
allow for the deferral of tax. It may also be possible
for the first time for UK resident settlors not to have
to be excluded from benefit without s.624 ITTOIA
(settlor interested trust) or s.720 ITA 2007 (transfer of
assets abroad) coming into play, but we will need to
wait to see the mechanics of the proposed regime
first.
What is also unknown is how distributions from
offshore trusts will be treated. This will be an
important factor for many wishing to settle assets
prior to becoming deemed domiciled, at least to the
extent they wish UK resident individuals to benefit.
General Law
Finally, the new landscape may make it more
important to assess taxpayers’ actual domicile under
general law, before undertaking any planning on the
basis they are non-deemed domiciled for tax
purposes. This is not to say that the 15 year point will
automatically become some sort of flag for HMRC to
indicate a possible actual UK domicile.
Interestingly, the perception amongst some of the
general public seems to be that it will be one’s non-
domicile status as such that will cease after 15 years
of UK residence. Whilst advisers know this is not
strictly true, we need to ensure we do not focus so
much on the forthcoming tax provisions that we lose
sight of the general law that will continue to underlie
it.
Profile
Edward Emblem is a Director in the Private Client Tax
Services department at Smith & Williamson and a core
member of the CIOT’s Succession Taxes technical sub-
group. He advises on all areas of personal taxation
and may be contacted at 01483 407139 or
Succession Taxes Voice | Issue 01 | April 2016 8
LOANS AND DEBTS
Gary Heynes and Kristina Volodeva consider the
various issues surrounding the use of loans and debts
in estate planning for non-UK domiciled individuals
and the impact of recent changes in the area
A quick recap
Domicile and the situs of assets are the only factors in
determining an individual’s liability to UK inheritance
tax (“IHT”).
As a result, the situs of an asset is a major factor for
UK IHT; determining it though is not always
straightforward and is generally done by reference to
statute, case law and sometimes double taxation
agreements. As a general rule, assets located in the
UK are subject to UK IHT, both on death and in case of
certain lifetime transfers, regardless of the domicile
position of the owner. Non-UK situs assets are
‘excluded property’ for UK IHT purposes, meaning
that they are outside the tax net, if owned by non-UK
domiciled (actual or deemed) individuals (“non-
doms”). Foreign situs assets settled on trust by a non-
dom can be permanently excluded from UK IHT.
While the situs of most real assets can be determined
relatively straightforwardly by their location,
intangible assets create more of a problem. Shares are
normally sited where they are registered or listed,
bonds by where they have been issued and
intermediated securities may require consideration of
whether they are opaque or transparent to determine
whether to look at the security itself or the underlying
assets.
Debts
Debts normally follow the situs of the debtor – the
one who owes the debt. However, the situs of a
‘specialty debt’ – a debt under deed that needs to be
formally signed, witnessed, delivered and is then
enforceable by action – has historically been
determined by reference to the physical location of
the deed. This meant that keeping the deed outside
the UK resulted in debt being foreign property, even if
the debtor is resident in the UK. This could be very
useful for a UK resident, non-dom because a debt they
owe could be sited in the UK if they are resident but
under Speciality would be excluded property (until
they become domiciled – either actual or deemed).
Specialty debts settled by non-UK domiciliaries on
trusts would also be ‘excluded property’ and as such
not be subject to trust IHT periodic charges (on each
ten year anniversary and on exit), potentially
permanently.
On this basis, therefore, specialty debts historically
constituted a commonly used, effective method of
mitigating the non-doms’ and trustees UK IHT
exposure.
But then…
The above tax treatment of specialty debts stemmed
from long-established legal practice and case law and
HM Revenue & Customs (“HMRC”) guidance.
However, in 2013 HMRC made an unexpected U-turn
on their views, updating their practice manuals to
advise that judging a specialty debt by its deed’s
location “may not be the correct approach in all cases”
and such debts “are likely to be located” in the
country of residence of the debtor (since January
2013), thus effectively downgrading a specialty debt
to a simple contract debt, or the location of the
collateral for the debt (since October 2013).
Succession Taxes Voice | Issue 01 | April 2016 9
HMRC taking this position means that the previously
afforded excluded property status would no longer be
available to non-doms holding specialty debts outright
if secured on UK property or issued to a UK resident.
Trustees with loans extended to UK resident
beneficiaries could be deemed to be holding UK assets
and have UK tax payment and reporting
requirements.
Current state of play
The changes, both unexpected and seemingly
unsubstantiated by either legal or technical analyses,
does not seem to be ones about which HMRC are too
certain either – the use of ‘may’ in the guidance is
somewhat of a giveaway and the promise to produce
something tangible to cement the ‘new and improved’
views on specialty debts has never materialised. This
revised approach has been somewhat mentioned
through the FA 2013 amendments made to section
874 (6A) Income Taxes Act (“ITA”) 2007: “no account
is to be taken of the location of any deed” for
determining whether withholding tax should be
operated on loan interest payments. However, no
matter-specific commentary followed thus far, despite
the clearly intended substantial impact the revised
approach would have on individuals and trusts alike as
well as requests for clarification and definitive
comments and concerns voiced by tax and legal
practitioners, STEP and ICAEW. Unscathed, HMRC for
now seem to be just planning to refer all cases
involving specialty debts to their Technical team.
As such, until and unless there is a precedent case, we
are unlikely to know how the theoretical changes will
apply in practice – and more importantly, from which
point. It remains to be seen whether HMRC would
seek to apply the change in views retrospectively,
which begs the question as to whether legitimate
expectation by those who have entered the previously
unfrowned upon arrangements in good faith is
sufficient protection from all but from the taxman.
And also…
In a further move to restrict the use of debts in estate
planning, new rules on the deductibility of loans in
calculating the value of estate or lifetime transfers for
IHT purposes were introduced with effect from 17 July
2013, negating, in the majority of cases, tax relief for
loans secured on UK assets but used to finance,
directly or indirectly, the acquisition or maintenance
of ‘excluded property’ or ‘relievable property’ (assets
qualifying for Agricultural Property, Business Property
or woodlands Reliefs) unless certain conditions are
met. Traditionally, the position has been that the
value of assets can be reduced by the value of the
outstanding liabilities, including any mortgages and
family loans, when calculating the taxable base for
IHT. The newly introduced restrictions can clearly
have a substantial impact on those with complex or
high value loan arrangements in place.
What now?
The practical reality is that specialty debts are an
established category of formal contract in common
law that has been in existence for many years and
entering such arrangements may not always be a
result of only the overwhelming desire to mitigate IHT
exposure that HMRC believe has penetrated the non-
dom society. With regards to deductibility of loans, it
may not always be possible to get an advance other
than by securing it on personal assets – consider an
owner of a struggling trading company who can only
get cash from the bank by offering personal assets as
collateral – would any relief be due to him in case of
an unfortunate event?
Given the changes in HMRC views, those individuals
and trusts that have arrangements involving debts in
place should exercise caution – whilst the position
Succession Taxes Voice | Issue 01 | April 2016 10
overall remains questionable in absence of any
specific legislation, reviewing and restructuring should
be considered. To the extent that no action is
deemed possible or worthwhile, it is crucial to ensure
that the existence of the arrangements is
appropriately and fully reported – if only as a means
of protection against a discovery assessment should
HMRC choose to press rewind.
Profile
Gary Heynes is a partner and Head of Private Client
for RSM in the UK. He has over 20 years of private
client experience, a significant part of which has been
gained in dealing with non-UK domiciled individuals
and their overseas structures.
Gary is an Associate of the Chartered Institute of
Taxation. Gary can be contacted at +44 (0)844
2640300 or by e-mail at [email protected].
Kristina is an Associate Director with RSM in the
Private Clients Tax team in London and both provides
UK tax advice and looks after UK tax compliance for a
number of clients, ranging from entrepreneurs and
private equity executives to wealthy families, most of
them with complex asset ownership structures and an
international angle to their affairs.
She has extensive experience in advising non-UK
domiciled individuals moving to the UK (with a focus
on those coming from Russia and CIS) on how to
arrange their affairs in a UK tax friendly manner.
Kristina can be contacted at +44 (0)20 3201 8776 or
by e-mail [email protected].
Succession Taxes Voice | Issue 01 | April 2016 11
BUSINESS
INHERITANCE TAX
AND TRUSTS:
WHERE ARE WE
NOW?
Harriet Brown provides an answer to the question so
many have asked
Introduction
Since 2006 the use of trusts in inheritance tax
planning has become progressively more difficult, and
less beneficial. This does not, however, mean that
trusts are useless in inheritance tax planning. In this
article I discuss some of the ways that trusts can still
be useful.
Qualifying Interests In Possession
The benefit of a discretionary trust would, absent the
provisions of the Inheritance Tax Act 1984 ("IHTA"), be
that property in it should not form part of any
individuals estate. IHTA deals with this in two ways:
the relevant property regime (which applies charges
to property held in many types of trust on the tenth
anniversary of the trust and when property leaves the
trust) and through treating property in which there is
a qualifying "interest in possession" ("IIP") as forming
part of the estate of the person beneficially entitled to
it.
A trust that has a qualifying IIP in it should not be
within the relevant property regime. The major
change in 2006 was that the categories of qualifying
interests in possession were significantly cut down.
The following now constitute the main categories of
qualifying IIPs:
those to which an individual became beneficially
entitled before 22nd March 2006;
an immediate post-death interest;
a disabled person's interest; and
a transitional serial interest.
Thus in most cases, it is no longer possible to create a
new interest in possession, and this means that the
majority of trusts will come within the relevant
property regime. Immediate post death interest trusts
(IPDIs) are IIPs that are in a settlement effected by will
or intestacy, the holder of the interest became
beneficially entitled to the interest in possession on
the death of the testator/intestate, section 71A (trusts
for bereaved minors) does not apply to the property
in which the interest subsists, the interest is not a
disabled person's interest, and the last condition has
been satisfied at all times since the holder of the
interest became beneficially entitled to the interest in
possession. Thus it remains possible to create an IPDI.
Both a disabled person's interest and a transitional
serial interest arise as a matter of circumstances and
so while they remain useful in situations where these
circumstances exist, they are not useful in planning
more generally.
Thus trusts in general planning are no longer as useful
as they were previously.
Pilot Trusts
While trusts have long been used in succession
planning and for many other reasons where tax is not
the primary driver behind the trust, trusts have also
been used in more aggressive tax planning and tax
avoidance. One such usage was that of pilot trusts.
Succession Taxes Voice | Issue 01 | April 2016 12
Under the previous rules for taxation of relevant
property trusts the calculation of periodic and exit
charges on trust property took into account the
settlor’s aggregated chargeable transfers in the seven
years prior to (but not on) the date of commencement
(IHTA 1984, s. 66(5)). Where, however, property was
added to a settlement at a later date, the aggregated
chargeable transfers taken into account was those
falling in the seven years prior to (but not on) the date
of the addition when that is greater (IHTA 1984, s.
67(3)(a)).
Pilot trusts exploited these provisions because where
property was added to two or more existing
settlements on the same day, those additions were
not taken into account for the purpose of calculating
the aggregate chargeable transfers on the others
(IHTA 1984, s. 67(3)(b)(i)). Therefore subsequent
charges were calculated without reference to same-
day additions. The additions were not brought into
account as “related settlements” under IHTA 1984, s.
62, because the settlements commenced on an earlier
date.
IHTA, section 62A – 62C (inserted by the Finance (No.
2 Act) 2015) have addressed this means of planning.
These provisions introduce rules to ensure that where
property is added to two or more settlements on the
same day and after the commencement of those
settlements, the value of the added property together
with the value of property settled at the date of
commencement (that is not already in a related
settlement) will be brought into account in
calculating:
the rate of tax for the purposes of ten year
charges under section 66;
©Shutterstock/enciktepstudio
Succession Taxes Voice | Issue 01 | April 2016 13
for exit charges before the first ten-year
anniversary under section 68; and
for exit charges between anniversaries under
section 69 for and for the charge on 18/25 trusts
under section 71F.
While there are some exceptions to the new
aggregation rules in IHTA, sections 62B and 62C
(which protects certain settlements that commenced
before 10 December 2014 from the new rules), the
opportunities to use pilot trusts to avoid or reduce
inheritance tax have been greatly reduced.
Foreign-Domiciled Settlors
One way in which trusts remain useful is for foreign
domiciled settlors. This is because property that is not
situated in the UK and which was settled at a time
when the settlor was not domiciled in any part of the
UK, will be outside the relevant property regime. Thus
offshore trusts used to hold non-UK situate property
that is settled by non-UK domiciled settlors still
provide an opportunity to reduce charges to
inheritance tax.
The downsides to using such trusts tend, however, to
come from taxes other than inheritance tax. In
practice such trusts are created during the settlor's
lifetime – rather than on death – and consequently,
there is a number of potential difficulties with the
settlor or the settlor's family accessing the property in
the trust. Such issues include the transfer of assets
abroad regime in the Income Tax Act 2007, Part 13,
the charges arising under the Taxation of Chargeable
Gains Act 1992, sections 86 and 87 and (possibly)
making remittances where the remittance basis is in
point.
This should not act as a deterrent to the use of trusts
in the case of a foreign domiciled settlor, but
competent advice should always be taken when
dealing with such trusts.
Finally, in this respect, it is important to remember
the rules for deemed domicile (IHTA, section 267) and
that the proposed introduction of deemed domicile
rules for income tax, is also intended to amend the
inheritance tax deemed domicile rules and
consequently, whether or not someone is deemed
domiciled in the UK for inheritance tax purposes will
also require careful consideration.
Profile
Harriet advises taxpayers in relation to UK tax
matters. She advises on all direct tax matters for
private and corporate clients as well as in the context
of trusts and estates, and on indirect tax matters. In
addition to advising extensively on traditional private
client matters, Harriet has a particular interest in
international matters such as double tax treaties,
TIEAs, disclosure facilities and conflict of laws issues
arising in a tax context. Harriet can be contacted at
[email protected] or on +44 ((020)
7242 2744.
Succession Taxes Voice | Issue 01 | April 2016 14
RESIDENCE NIL RATE
BAND: AN OUTLINE
Allan Holmes guides us through some key issues
regarding the Enhanced Nil Rate Band for residential
property
Introduction
The Conservative party 2015 election manifesto
stated that it would “take the family home out of tax
by increasing the effective Inheritance Tax threshold
for married couples and civil partners to £1 million”.
The Chancellor duly announced proposals to bring
into force the election pledge in the Summer Budget
2015 and the provisions were duly enacted in Finance
(No 2) Act 2015. The Government is expecting the
legislation to cost approximately £980 million per year
when the maximum relief is introduced in 2020/21,
that is almost £2.5 billion of residential property value
predicted to move outside of the IHT net!
In this article I look at some of the key aspects of the
legislation and the direct issues which need to be
considered going forward. I then recap IHT planning in
relation to UK residential property and the potential
impact of the legislation.
Key provisions
The legislation introducing the residence nil rate
amount (RNRA) is effectively bolted on to the existing
legislation for the nil rate band and the transferrable
nil rate band (s8D –s8M IHTA1984). It is beyond the
scope of this article to set out a detailed analysis of
the legislation (there is not enough space!) but as you
will see it is extremely complex with some difficult
areas.
The main points to be aware of are as follows
The relief applies to residential property
which is included in an individual’s estate on
death and which is bequeathed to children
and descendants (including step children) and
/or their spouses.
The property must pass into the estate of the
descendant or onto a favoured trust for their
benefit i.e. to them outright or onto an
Immediate Post Death Interest, Bereaved
Minor, 18-25 or Disabled Persons trust.
The residential property must have been
occupied by the individual as a residence at
some time but does not need to have been
their main residence. It is possible to choose
which property obtains the relief via an
election.
The legislation will apply to deaths from 6
April 2017.
The relief is in the form of an “enhancement”
of the nil rate band available on death and is
used in priority to any other elements of the
nil rate band (ordinary nil rate band or
transferred nil rate band).
The maximum relief starts at £100,000
(2017/18) then rises by £25,000 per year until
it reaches a maximum of £175,000 for
2020/21.
Whilst the relief is calculated by reference to
the value of the residential property
transferred on death, it is applied across all of
the chargeable estate.
Unused relief can be transferred to a surviving
spouse or civil partner on a claim.
For deaths prior to 6 April 2017 the surviving
spouse will be able to claim the deceased
persons RNRA (as it would have been
impossible for them to use it). The deceased
does not need to have owned a property.
Succession Taxes Voice | Issue 01 | April 2016 15
The £1 million inheritance tax threshold is
reached by 2X NRB of £325,000 plus 2x RNRA
of £175,000.
The relief is withdrawn by £1 for every £2 the
estate exceeds £2m – so for an individual it is
lost after £2.35 million (£2.7 million for a
surviving spouse). The estate is calculated
before reliefs such as BPR and APR.
Additional legislation will ensure that an
individual who downsizes in later life is not
disadvantaged.
The legislation contains a number of
definitions and formulae which require
extremely careful navigation.
Planning around the legislation
Legislation of this complexity will take some time to
bed in and even though the relief does not come into
force for another year it needs to be considered now,
in particular in relation to will drafting and in
situations where one spouse may die before 6 April
2017.
I am sure that there will be further aspects of the
legislation to focus on but some initial points are as
follows:
It only apples to transfers of qualifying
residential property on death to qualifying
descendants – so property gifted just before
death cannot qualify.
The restriction of the amount of relief applies
by reference to the value of the estate on
death; it does not include failed PETs so gifts
pre death of other assets may be a good idea.
Property identification will be important as if
the property was never used as a residence by
the deceased the relief is not available. It will
also be necessary to ensure that there is
©Shutterstock/Vadim Georgiev
©Shutterstock/Vadim Georgiev
Succession Taxes Voice | Issue 01 | April 2016 16
sufficient evidence to prove that the property
was occupied by the deceased as a residence.
The RNRA is not available on transfers to
relevant property trusts.
The likely value of the estate of the surviving
spouse needs to be considered, there is no
point passing all of the deceased’s assets to
the spouse and with it the full RNRA if the
spouse is likely to have a combined estate on
death greater than £2.7 million.
Gifts with reservation of benefit WILL qualify
for the relief as the value will be included in
the estate of the deceased.
The time limits for claiming the deceased
spouse allowance will need to be carefully
monitored.
Will drafting is now much more complicated
as it will be necessary to factor in the RNRA
and ensure that there is a qualifying property
to leave to a descendant.
Effect on existing planning
Estate planning around the family home has always
been difficult and there are few effective planning
ideas around. A number of individuals have planned
via a gift of their residence and the payment of rent
but there are income tax and capital gains tax
downsides. This is likely to become less popular as a)
for many people it will be unnecessary and b) it may
result in loss of the RNRA. Others have based their
planning on the exemption from the reservation of
benefit provisions available for joint occupation but
this is often not easy to achieve in the long term, the
RNRA will in some circumstances allow scope to
default to the reservation of benefit provisions.
Current will planning under which residential property
is transferred to a relevant property trust is likely to
be less popular, again due to the loss of the RNRA.
For younger individuals, simple term life insurance is a
good medium term option.
Gifts of other property pre death are likely to become
more popular in order for the estate on death to be
below £2 million, even if there is little likelihood that
the donor will survive three years. It will be necessary
to consider the capital gains tax implications.
As with much modern legislation it is a pity that a tax
relief which can be summarised in a few words is
enmeshed in such complicated provisions.
Profile
Allan is a member of the Private Wealth and Estates
Group at Saffery Champness and specialises in trust
and private client compliance and tax advisory work.
He has over 25 years’ experience, working in London,
the Channel Islands and Cambridge, with ‘big four’
accountancy firms, and in the North East with a major
law firm.
Allan acts for a number of UK and offshore trustees in
addition to a wide range of predominantly UK-based
individuals.
Allan can be contacted at [email protected]
or by telephone at +44 (0)20 7841 4115.
Succession Taxes Voice | Issue 01 | April 2016 17
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Succession Taxes Voice | Issue 01 | April 2016 18
CONSULTATIONS AND SUBMISSIONS
CIOT Succession Taxes Submissions: February 2015 – present
DFB15 Clauses on Calculation of IHT on settled property
http://www.tax.org.uk/policy-technical/submissions/dfb15-clauses-calculation-iht-settled-
property-ciot-comments
04/02/2015
DFB15 Clauses on IHT Emergency Service Personnel exemption 153A IHTA 1984
http://www.tax.org.uk/policy-technical/submissions/draft-fb15-clauses-iht-emergency-service-
personnel-exemption-ciot
04/02/2015
DFB15 Clauses on calculation of IHT on settled property – follow up letter
http://www.tax.org.uk/policy-technical/submissions/dfb15-clauses-calculation-iht-settled-
property-ciot-comments
12/02/2015
Protected testamentary Disposition
http://www.tax.org.uk/policy-technical/submissions/improving-definition-protected-
testamentary-disposition-ciot-comments
26/02/2015
Disclosure of Tax Avoidance Schemes; draft Inheritance Tax hallmark regulations
http://www.tax.org.uk/policy-technical/submissions/disclosure-tax-avoidance-schemes-draft-
inheritance-tax-hallmark
10/09/2015
HMRC Review: Looking at use of Deeds in Variation for tax purposes
http://www.tax.org.uk/policy-technical/submissions/deeds-variation-tax-purposes-ciot-comments
07/10/2015
Inheritance Tax on main residence nil-rate band and downsizing proposals
http://www.tax.org.uk/policy-technical/submissions/main-residence-nil-rate-band-and-
downsizing-proposals-ciot-comments
20/10/2015
Draft Finance Bill 2016 Clause 44 Inheritance Tax - Increased nil-rate band – downsizing
http://www.tax.org.uk/policy-technical/submissions/draft-finance-bill-2016-clause-44-
inheritance-tax-increased-nil-rate
02/02/2016
Succession Taxes Voice | Issue 01 | April 2016 19
Domicile: Income Tax and Capital Gains Tax
http://www.tax.org.uk/policy-technical/submissions/domicile-income-tax-and-cgt-new-clause-
and-schedule-ciot-comments
29/02/2016
Proposals to reform fees for grants of probate
http://www.tax.org.uk/policy-technical/submissions/proposals-reform-fees-grants-probate-ciot-
comments
01/04/2016
ATT Technical submissions: January 2015 – present
DFB15 Clauses on IHT Emergency Service Personnel exemption 153A IHTA 1984
http://www.att.org.uk/technical/submissions/draft-fb15-clauses-iht-exemption-emergency-
service-personnel-att-comments
26/01/2015
HMRC Review: Looking at use of Deeds in Variation for tax purposes
http://www.att.org.uk/technical/submissions/deeds-variation-att-response
08/10/2015
Proposals to reform fees for grants of probate
http://www.att.org.uk/technical/submissions/proposals-reform-fees-grant-probate-att-comments
01/04/2016
Succession Taxes Voice | Issue 01 | April 2016 20
Future branch events
East Anglia 3 May 2016
Inheritance tax and trusts – joint meeting with STEP
North East England 12 May 2016
Capital Taxes
Suffolk 22 June 2016
Succession Planning and the Family Company - joint
conference with Essex Branch
EVENTS
Succession Taxes Voice | Issue 01 | April 2016 21
CONTACT US
To contact the Succession Taxes technical officer, John Stockdale, please email: [email protected]
To contact Alison Ward, the ATT technical officer dealing with these matters, please email: [email protected]
Editorial Team
Editor-in-chief Chris Mattos CTA ATT [email protected]
Editor Lakshmi Narain CTA [email protected]
Designer Sophia Bell [email protected]
© 2016 Chartered Institute of Taxation
This publication is intended to be a general guide and cannot be a substitute for professional advice. Neither the
authors nor the publisher accept any responsibility for loss occasioned to any person acting or refraining from acting
as a result of material contained in this publication.
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