HMRC IHT & Trusts Newsletter – December 2007

20th December 2007

HMRC have published the second issue of their joint IHT & Trusts Newsletter. It deals with the following topics:

Transferable nil rate band
Applying for IHT references
When excepted estates are no longer excepted estates
Excepted estates and exemption under paragraph 2 schedule 6 IHTA 1984
Conditional exemption and National Heritage matters
IHT and the valuation of property owned jointly by spouses or civil partners
Valuation of real and leasehold property
Relief under section 179 IHTA 1984 for loss on sale of shares
Reporting requirements for lifetime transfers and trusts
IHT presentations
Trust and Estate Tax Returns: Changes to Self Assessment filing
Tax payments in Trust cases
Agent authorisation and Form 64-8
Settlor-interested trusts and income tax
Guidance – “What to do about tax when someone dies”

Transferable nil rate band

They report that they are giving provisional effect to the transferable nil-rate band proposals and allowing applications for grants to proceed on the basis that the new rules will be made law in the Finance Act next year. Form IHT216 must be used and can be downloaded from the HMRC website at www.hmrc.gov.uk/cto/forms1.htm. They will not, however, be able to settle any cases where unused NRB is transferred until after the 2008 Finance Bill receives Royal Assent and becomes law. This means that no clearance letters will be provided until after about July 2008.

They discuss what will be needed after the second death. The personal representatives should make arrangements for information required to support a claim to transfer unused nil rate band to be made available to the surviving spouse or civil partner. The sort of information and documents that will be needed about the first death are:
a copy of the IHT return (IHT205 or C5 in Scotland, or IHT200) or full written details of the assets in the estate, including any lifetime gifts made, and their values,

a copy of the death certificate,
a copy of the marriage certificate or civil partnership certificate,
a copy of the grant of representation (Confirmation in Scotland),
a copy of the Will, if there was one,
a note of how the estate devolved if there was no Will,
a copy of any Instrument of Variation or other similar document if one was executed to change those who benefited from the estate.

“If any specific assets are chargeable to IHT on the first death, a copy of any valuation obtained will be useful; and if any chargeable assets would have qualified for relief (for example, business property relief), details of how the asset so qualified should also be retained.”

The rationale for this is that HMRC’s authority to provide information about teh first death may well be limited until after probate has been granted on teh second death:

“Information we hold about an estate is confidential and we cannot release that information to anyone other than the taxpayer (the personal representatives of the first to die) or their appointed agent. In the not uncommon situation that the surviving spouse or civil partner is the only person entitled to the information, we will be able to provide any information that we may hold about the first death to their personal representatives, but only where they are entitled through the chain of representation.

“In any other case, we will not be able to provide information that we may hold about the first death until after a grant has been obtained in the second estate. This means that any claim to transfer unused NRB will have to be based on the information otherwise available to the personal representatives. Once a grant has been obtained in the second estate, and since it is then necessary for a purpose of HMRC, we will be able to tell you what our records show about the extent to which the NRB was unused on the first death.”

Valuation of real and leasehold property

There is some discussion about claims that real or leasehold property in an estate should be valued at less, often substantially less, than the full open market value, often based an assertion that someone, usually a family member, has a beneficial interest in the property where their name is not on the legal title.

They refer to Stack v Dowden [2007] 2 All ER 929, where Baroness Hale of Richmond, who gave the leading judgement, commented, at page 953, that:

“The burden will therefore be on the person seeking to show that the parties did intend their beneficial interests to be different from their legal interests, and in what way. This is not a task to be lightly embarked upon … In joint names cases [a full examination of the facts] is also unlikely to lead to a different result unless the facts are very unusual”.

As a result, they ask practitioners to consider all the facts carefully before making a claim of this nature on behalf of their clients and will expect to receive a full and detailed account of those facts together with all the relevant evidence, as if the claimant were presenting the claim to a court of law. They cite the dictum of Walton, J in Re Gonin (deceased) [1977] 2 All ER 720:

“… all claims against the estate of a deceased person which had not been put forward whilst they were still living, fall to be scrutinised with considerable care, for the obvious reason that the other party to the agreement is in the nature of things unable to give his or her version of events …”.

In future, unless there is a case that they consider sufficiently strong that it would be upheld by the courts, the claim will be rejected.

Trust & Estate Tax Return – changes to Self Assessment filing

They refer to important changes to the rules concerning the Trust & Estate Tax Return (SA900), applying to the 2007-08 return and later years. The main changes are:

different filing dates for paper and online returns,
the withdrawal of all substitute returns, and
linking the enquiry window (the period in which HMRC can open an enquiry into a return) to the date the return is delivered.

Paper returns will now have to be filed by 31 October (2008) and online returns must be filed by 31 January (2009). The deadlines for paying tax are unchanged. From April 2008, HMRC will no longer accept or approve computer generated substitute versions of the Trust & Estate Tax Return series (SA900+). This means that you must file either a paper return or file online. The closure of the enquiry window, that is the statutory period in which HMRC may open an enquiry into a return, will be linked to the date on which that return is delivered: where a return is filed on time, the enquiry window will close 12 months after the return is delivered. Further information can be found on the HMRC website at hmrc.gov.uk/budget2007/bn80.pdf

Settlor-interested trusts and income tax

Following teh changes in the Finance Act 2006 HMRC have issued guidance on the new provisions. The other rules about settlor-interested trusts remain the same.

Changes to tax law
Change to rates of tax paid by trustees of accumulation/discretionary trusts
Section 89 FA 2006 made a change to the way trustees of settlor-interested accumulation / discretionary trusts are taxed. Until FA 2006, trustees of settlor-interested trusts were exempt from the special trust rates. FA 2006 withdrew the exemption, so that from 6 April 2006 trustees of settlor-interested accumulation/discretionary trusts are liable at the special rates for trustees: the trust rate (40%) and the dividend trust rate (32.5%). Trustees should make returns as before, but now tick both box 8.12 and box 8.16 on the Trust & Estate return.The settlor is still taxable on the income, and gets a credit for the tax paid by the trustees. It is just that the tax will have been paid at higher rates.
Change to treatment of income taxed on the settlor
Section 89 FA 2006 made a change to the way income is taxed on the settlor.
Until FA 2006, trustees’ income chargeable on the settlor was treated as either dividend type income taxable at the dividend ordinary rate or the dividend upper rate, or Case VI income taxable at basic rate or higher rate on the settlor. FA 2006 changed this, so that from 6 April 2006 the income taxed on the settlor retains its original character. So it is treated as dividend type income or other income, depending on the source. Consequently the dividend, lower/savings or basic rate will now apply to the settlor (subject to starting and higher rates).
Change to treatment of income in the hands of the non-settlor beneficiary
Old rules
Prior to the FA 2006 changes, trustees of settlor-interested settlements did not show discretionary payments at all, and the non-settlor beneficiary also did not include payments in his/her SA107, so they were outside the tax pool arrangements. This was not strictly correct, as a discretionary payment to the non-settlor beneficiary constitutes a new source of income in their hands. But we treated the measure of the beneficiary’s income as nil, to avoid taxing the same income twice.
(Both before and after FA 2006, discretionary income payments to the settlor are disregarded by law.)
New rules - trustees
FA 2006 inserted a new section (685A) into ITTOIA. This provision means that discretionary payments to non-settlor beneficiaries are properly outside the tax pool arrangements. Such payments are shown separately in both the trustees’ and the non-settlor beneficiary’s returns.
They do not carry a repayable 40% tax credit and so the trustees do not need to gross up the payments or account for additional tax to cover the credit. Because of this, such payments should not be shown in Q14 - they should instead be shown in the ‘Additional information’ box (21.11).
Where the settlement is partly settlor-interested and partly not, there must be a distinction in the way discretionary payments are dealt with. Rather than try to attribute them to the underlying income, FA 2006 provides for a statutory apportionment. The amount of the discretionary payments from the settlor-interested part is the same proportion of the total discretionary payments as the proportion of total income that is chargeable on the settlor. So, for example, if the trustees’ total income is £5,000, of which £1,500 is chargeable on the settlor and they make discretionary payments of £2,000, then the entry in 21.11 is:
2,000 x (1,500/5000) = 600
The difference (2,000 - 600 = 1,400) goes in Q14 as normal.
Due to a problem with the underlying tax calculation, where all or part of the settlement is settlor-interested our tax pool computation (which is shown on some of our output letters) will be incorrect. We’re looking to rectify this but that may not be possible until the 2007-08 return is ready.
New rules - beneficiaries
From 6 April 2006, in the hands of the beneficiary, discretionary payments from a settlor-interested settlement do not carry a repayable 40% tax credit. Instead, the payment is treated as though tax has been paid at 40%. This is notional tax, which is ring-fenced - it cannot be set sideways against any other income of the beneficiary and cannot be repaid. There is a new box (7.3A) for such payments on the SA107 - the R185(Trust Income), the form which trustees can use to advise beneficiaries of the amounts they have been paid and associated tax credits, has been amended to reflect this.
The beneficiary returns the actual amount they receive - there is no grossing up. So whatever the beneficiary’s marginal rate, the notional tax covers their liability on that income - if he/she is anything other than a higher rate taxpayer, part of the notional tax will be lost. While the beneficiary has nothing further to pay on the trust payment itself, it is nevertheless included in the beneficiary’s total income and may push other income/gains into a higher tax rate bracket. We are aware of this issue and are considering it.
Changes to procedures
Where settlor returns income – 2006-07
Income chargeable on the settlor of a settlor-interested trust in 2006-07 should be returned in the Trusts etc supplementary pages (SA107) in boxes 7.4 to 7.12. The only exception to this is foreign source income, which should be returned in the Foreign pages (SA106), as before.
The tax calculation has been amended so that it will accept any percentage rate in the tax credit boxes (7.5, 7.8 and 7.11). The actual credit may not correspond to an exact rate where part of the income, otherwise chargeable at the special trust rates in the hands of the trustees, falls within their standard rate band or has been applied on trust management expenses (so that the special trust rates don’t apply).
For example, the trustees may receive £1,000 of bank interest but apply £200 of it on allowable expenses of management. That £200 would be chargeable at 20% and the balance of £800 at 40%, giving a total liability £360. The settlor is chargeable on £1,000 (box 7.9) and the tax credit available to him/her is £360 (box 7.8).
Where settlor returns income – 2007-08
The design and format of the personal return is changing for 2007-08 and later years. The new SA107 will have a separate section for settlor income.
The familiar three box format (net, tax credit and gross) is being replaced with a single box for the net amount.
The underlying calculation will apply the correct tax credit but this does mean there will be separate boxes for income chargeable at the three standard and two special trust rates, as well as for income where no tax has been suffered/deducted. In the above example, the settlor would have to return £200 in the savings rate income box and £800 in the trust rate income box.