.png)
.png)
HMRC have recently confirmed to the Association of British Insurers that gifts to minors through absolute trusts will be treated as chargeable lifetime transfers and not potentially exempt transfers because the child can only access the trust when he or she reaches 18. Thus where Trustee Act, s 31(2) applies, HMRC's solicitors' view is that it is arguable that it would be a 'trust to accumulate the whole or part of any income' within IHTA 1984, s 43(2). This means that they will be subject to entry, ten-yearly periodic and exit charges, whereas gifts to adult children through an absolute trust will be treated as PETs. This treatment may deter parents and grandparents from making gifts to minors outside of a trust, as the children will be too young to manage the money properly.
Skandia's Colin Jelley says that the Government has failed to evaluate the consequences of this rule. For instance, if a parent makes a gift to two children, one of whom is over 18 and the other is a minor, the gift to the older child will be treated as a PET but the one to the minor as a chargeable lifetime transfer.
In addition, Mr Jelley says that the laws in Scotland and England differ; so that a minor domiciled in England is entitled to access an absolute trust at age 18, whereas a minor domiciled in Scotland can access it from age 16. Therefore if a grandparent made a gift to each of two children both aged 17 at the same time, one of whom is domiciled in England and the other is domiciled in Scotland, the gift to the child domiciled in England would be treated as a chargeable lifetime transfer, while the gift to the child domiciled in Scotland would be treated as a PET.
Mr Jelley says that this problem affects 'financial arrangements including mutual funds and bank accounts' as well as life insurance. Anyone who is saving money for children and has set up a trust to protect them is affected. He says that this 'must surely be an unintended consequence of the changes introduced in last year's Finance Act', as it effectively introduces 'a tax charge on almost all gifts being made to children'.
The ABI has published an update on the problem with bare trusts, as well as other unresolved issues concerning trusts and inheritance tax. Discussions with HMRC continue and the aim is ultimately to produce guidance on these matters. The ABI's update tells members to note that 'HMRC does not “take the point” that an absolute trust for a minor may be a settlement in respect of the small gifts IHT exemption that applies to “outright” gifts. We understand that HMRC do not propose to change their position in this area'. HMRC have confirmed the following to Taxation: 'Following the changes last year to the inheritance tax treatment of trusts HMRC have been discussing its technical guidance on the new rules with a number of professional representative bodies. Once these discussions are complete this guidance will be published on HMRC's website. At the moment a number of particular areas remain under discussion. Contrary to various reports the application of law to “absolute trusts for minors” (sometimes called “bare trusts for minors”) is one area that HMRC are still considering before issuing final guidance'.
Pensions term assurance
Following the announcement on the review of pensions term assurance contained in section 5.77 of the Pre-Budget Report, the Treasury and HMRC have been discussing a number of issues with insurance industry representatives. See also Update, Taxation, 14 December 2006, page 271 and Mike Truman's article in this issue at pages 42 to 44. As part of these discussions, the industry asked for some specific and immediate guidance regarding customers who had applied for a policy on or before the 6 December 2006, but where the policy has yet to be issued. HMRC have published a statement which provides guidance on this topic in advance of the more general consultation that the Pre-Budget Report proposes. HMRC's statement is reproduced below.
'Those customers who have applied for policies on or before 6 December will be treated in the same way as those whose policies have already been issued — they will continue to benefit from tax relief, and will be unaffected by the announcement in the Pre-Budget Report, with the conditions below.
'In response to requests from the insurance industry we recognise that there will be some customers whose application was not received by the insurance company on or before 6 December, even though it had been completed by the customer and submitted, possibly via an adviser, to the insurance company on or after that date.
'Therefore in all cases where an application applying for life insurance cover has been fully completed on or before 6 December, submitted to the insurance company and receipt recorded by that insurance company by midnight on 13 December 2006, the existing tax relief regime will apply, provided that the “sum assured” issued is no greater than that applied for on or before 6 December 2006. Treatment of increases will be considered as part of the wider consultation. Insurers will have until 5 April 2007 to process this business, so that appropriate medical evidence can be checked and an appropriate commencement date for cover settled.
'For the avoidance of doubt applying for life insurance cover does not include merely applying for a quotation with no other commitment.'
www.hmrc.gov.uk
Encouraging compliance
Proposals on a new information power to counter non-compliance with the tax avoidance scheme disclosure regime by promoters were published in a consultation document by HMRC in December. Announced in the Pre Budget Report, the proposals intend to give HMRC power to call for information in cases where there is reasonable evidence of non-compliance with the disclosure regime. HMRC say that while most promoters are applying the rules properly, a minority are not, and this is a problem for HMRC since they have currently no specific powers to enquire into the failure to disclose a scheme.
The consultation is intended to ensure that the proposed information power will be a proportionate and targeted response to any non-compliance encountered. The power would be exercised via the Special Commissioners.
The Government intends, subject to the outcome of the consultation, to introduce legislation in the Finance Bill 2007.
'HMRC are once again tightening the screws on tax avoidance scheme providers', says Grant Thornton's Francesca Lagerberg. They want to make life uncomfortable for those who are not playing by the rules and she says that it ties in with HMRC's stated intention of 'removing' tax avoidance by 2008. However, while few will have sympathy for those who have ignored or deliberately sought to escape the clutches of the disclosure of tax avoidance scheme rules by not reporting what should have been reported, Francesca suspects 'most accountants and tax advisers have gone to great lengths to comply and only a small number of providers, some of whom may be offshore, are flouting the rules'. She is concerned that in their zealousness to shut down schemes, 'HMRC will make the anti-avoidance regime so complex and cumbersome that it takes up considerable time to show that acceptable forms of tax planning are not caught'.
HMRC news release dated 18 December 2006
Bonuses for tax
A number of national newspapers have suggested that tax inspectors are being offered bonuses to encourage them to collect more money from taxpayers. It is certainly true that HMRC operate a 'performance management scheme' and on their website they say that they 'believe that there should be a direct link between performance and your salary', but a spokesman for HMRC says that 'HMRC inspectors are not and will not be paid bonuses linked to the amount of tax they collect', HMRC exist to collect the tax that is legally due.
It is also true, however, that HMRC are under orders to increase the tax yield in the next two years, the aim being to collect an additional £3.5 billion taxes unpaid but due, a year. So while the stories about bonuses being related to the amount of extra tax collected are denied by HMRC, it would be appropriate for them to make it clear how performance related bonuses are paid and to publish the criteria on their website.
