Inheritance Tax, Bonds and IHT Disclosure Rules

September 06, 2016

Wills and Probate

Inheritance Tax, Bonds and IHT Disclosure Rules

Inheritance Tax and Bonds 

In 2006 the rules for discretionary trusts were changed.  The changes began to bite from April 2016.  

Often salespeople of investment bonds advise that the product should be put into trust.  The problem is best illustrated by an example.  

Freda bought an investment bond for £250,000 on 1st June 2006 and immediately made it subject to a discretionary trust for her 4 children.  Having no available exemptions the whole of the £250,000 was a chargeable lifetime transfer but no inheritance tax was payable because it fell within the £285,000 nil rate band.  Had it exceeded this figure there would have been an immediate 20% inheritance tax liability.  

The trustees made no distributions or appointment of capital during the first 10 years of the trust.  On the 1st June 2016 the investment bond was valued at £450,000.  Since this exceeds £325,000 nil rate band there is a periodic charge of £450,000 - £325,000 = £125,000 at 6% = £7,500.  The trustees must make an inheritance tax return within 6 months of the 10 year anniversary.  Subsequent withdrawals from the bond will face an exit charge at 1.125%.  

The problem is that the increase in the value of the bond far exceeds the 14% increase in the nil rate band since 6th April 2006.  

The situation will get worse because the chancellor has indicated that the nil rate band will not be increased for some years having been set at £325,000 as long ago as 6th April 2009.  Thus, whilst the  value of a bond should increase there will be little increase in the inheritance tax threshold.  

Draft Inheritance Tax (IHT Disclosure Rules) 

The government has issued revised regulations for the disclosure of tax avoidance schemes (DOTAS) for inheritance tax.  The profession is making representations because they are very wide requiring disclosure of what are client specific normal planning arrangements.  HMRC is claiming that all contrived or abnormal arrangements designed to save inheritance tax must be disclosed but do not define ‘contrived or abnormal’ arrangements.  They claim these ought to be judged through the eyes of an ‘informed observer’.  

posted by Frank Collingwood | September 06 2016