Pre Budget Report 2009 - Inheritance Tax

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04/01/1900

Inheritance Tax

The nil rate band of £325,000 will be frozen for the 2010/11 tax year.

In the Finance Act 2006, the inheritance tax relevant property rules for settlements were extended to all settlements (other than bare trusts, certain trusts for the disabled and immediate post-death interest (IPDI) trusts). The change of rules has, however, given rise to a number of loopholes that tax planners have sought to exploit. The Government has announced that it will be introducing provisions to prevent this avoidance and has published draft legislation.

Two particular types of scheme will be affected:-

(i) If a person makes a gift into a settlement under which he retains a future reversionary interest, that interest would have a value for IHT purposes which means that the transfer of value (the loss to the estate) is reduced which, in turn, means it is easier to keep the chargeable lifetime transfer within the settlor’s nil rate band. If the settlor subsequently gifted the reversionary interest that would be a PET which would mean that, in the right circumstances, most of the property could be gifted with only a small amount consisting of a chargeable lifetime transfer.

Alternatively, if the settlor’s interest vested and that interest then constituted an interest in possession, under the post Finance Act 2006 rules that interest would have no value for inheritance tax.

This loophole will be addressed by new legislation which will apply where a person transfers property into a trust in which they (or their spouse/civil partner) retains a future interest. It provides that there will be a chargeable transfer for IHT purposes when the future interest comes to an end and the person becomes entitled to an actual interest under the trust. If that future interest is given away before the person becomes entitled to an actual interest, it may be immediately chargeable to IHT.

As with all anti-avoidance legislation, it is important to consider which arrangements it may affect and so this will need careful consideration. In this respect, it is comforting to note that HM Treasury states that this legislation is designed to close down two “artificial schemes designed to avoid inheritance tax charges on relevant property trusts”. Also, HMRC has stated (verbally) that it believes this change will apply to a small number of cases. It seems therefore most unlikely that HMRC will attempt to apply the legislation to the more mainstream mass marketed IHT schemes that are available.

(ii) A non-IPDI (immediate post-death interest) interest in possession has no value for IHT purposes under the revised legislation. This means that if a person uses cash to purchase an interest in possession under a trust (which is, say, for the benefit of his family) for full market value he will swop a valuable asset for an asset that has no value for IHT purposes.

The new legislation provides that such an interest will be treated as part of the purchaser’s estate for IHT purposes and if the interest comes to an end during the purchaser’s lifetime, there may be an immediate charge to IHT.


All the information and views given in this Bulletin are presented for general consideration only. Accordingly, Capital Ideas can accept no responsibility for any loss occasioned as a result of any action taken or refrained from as a result of the contents hereof. Readers and must always seek independent advice before taking
or refraining from taking any action.

The contents of this Bulletin are based on the proposals put forward by the
Chancellor in his Pre Budget Report. These need to be approached with caution as the details may change before the Finance Bill is presented to Parliament

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