Changes to the Inheritance Tax rules in relation to the delivery of accounts for lifetime gifts and charges on trusts

Have you made any large lifetime gifts or do you look after a trust? If so, you may need to submit an Inheritance Tax account to HM Revenue & Customs.

New Regulations have changed the Inheritance Tax rules in relation to the delivery of accounts for lifetime gifts, the termination of a life interest in trust property and charges on assets held in or leaving certain trusts. The new Regulations came into force on 6 April 2008 and have a retrospective commencement date of 6 April 2007.

In the aftermath of the Budget 2006, more types of lifetime gifts required an Inheritance Tax account to be delivered to HMRC. However, the new rules will reduce the number of Inheritance Tax accounts that would otherwise need to be delivered. They provide as follows:

Lifetime gifts

An Inheritance Tax account will often be required when a lifetime gift is made to another individual or certain types of trusts.

The new rules basically create 2 tests:

1. Where the gift is of cash or quoted shares, an Inheritance Tax account will be required if its value exceeds the inheritance tax threshold (i.e. £312,000 for the current tax year).

2. Where the gift is any other type of asset, an Inheritance Tax account will be required if it exceeds 80% of the inheritance tax threshold (i.e. £249,600).

For example, a lifetime cash gift of £300,000 would not require an Inheritance Tax account. However, a lifetime gift of a property worth £300,000 would require an Inheritance Tax account.

Terminations of a life interest in trust property

An Inheritance Tax account will often be required when an individual’s life interest is terminated.

However, an individual is able to use their own personal exemptions against the value transferred to them. If the value transferred is covered by their exemptions an Inheritance Tax account will not be required.

Charges on trusts

An Inheritance Tax account will be required for charges on assets held in or leaving certain trusts.

However, this requirement will not apply if:

1. the person setting up the trust and the trustees lived in the UK from the date the trust was set up, and no other trusts were created on the same day.

2. the value does not exceed 80% of the nil rate band (i.e. £249,600) and arises from the following events:

• 10 year anniversary of the trust
• Capital distributions from the trust
• On an 18-25 trust where the person to benefit reaches a specified age of 18-25.

If you need any help preparing Inheritance Tax accounts, please contact Victoria Spratt.