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HMRC plan to change the scope of the existing excepted transfer and excepted settlements regulations so that fewer returns will need to be submitted. Taxpayers will no longer have to deliver an account in qualifying circumstances which are set out in regulations.
These are:
- the Inheritance Tax (Delivery of Accounts) (Excepted Transfers and Terminations) Regulations 2002 for lifetime transfers, and
- the Inheritance Tax (Delivery of Accounts) (Excepted Settlements) Regulations 2002 for relevant property trusts.
Malcolm Gunn of Squire Sanders and Dempsey explains that the current inheritance tax regulations require returns of all chargeable transfers which are made even where the amount involved is relatively insignificant.
Only transfers not exceeding £10,000 do not need to be reported and in the case of the termination of an interest in possession in settled property, the limit is even lower.
The reasoning behind these exceedingly low limits has not been clear, given that no tax would be due until the nil rate band is exceeded, but presumably the Capital Taxes Office wished to maintain cumulative records of chargeable transfers made by each taxpayer.
In practice, it was probably not widely appreciated that the limits were so low and although penalties could be charged for late returns, where no tax was due, frequently no penalty was incurred.
HMRC's proposals provide a very considerable relaxation in the threshold for inheritance tax returns. It is proposed to link the threshold to movements in the inheritance tax nil rate band so that, with the current threshold of £300,000, a return of a chargeable transfer would not be required unless the value of the asset in the hands of the transferor before the transfer, and also the value transferred by that transfer does not exceed 70% of the threshold, that is £210,000.
It would also be a requirement that the cumulative total of all chargeable transfers to date made by the transferor in the seven years preceding the current transfer, and including that transfer, should not exceed a second limit and it is proposed that this would be 15% below the inheritance tax threshold, i.e. on current figures £255,000.
It will still be the case that returns of all dispositions that are deemed to be a transfer of value would still be required.
For relevant property settlements (previously discretionary trusts) there would be a separate regime so that returns would not be required where the formula producing the amount for calculating the rate of tax under IHTA 1984, s 66, s 68 or s 71E results in a figure which is 30% below the IHT threshold.
HMRC intend that the regulations will apply to all transfers into trusts and relevant property trust chargeable events occurring on or after 6 April 2007. See here for full details.
Comments on the proposals are invited and should be sent by the end of August to: Tony Key, HMRC Inheritance Tax, Ferrers House, PO Box 38, Castle Meadow Road, Nottingham NG1 2BB.
'Evidently it has been appreciated by HMRC that under the new inheritance tax regime for trusts, many more chargeable transfers will now arise leading to a significant increase in the number of returns made', says Malcolm Gunn. 'The new proposals are no doubt designed to curb the flow of somewhat useless paper into the Capital Taxes Office.'
Colin Jelley of Skandia Group welcomes these proposals saying: 'If these changes go ahead as proposed, this will be excellent news for advisers and clients. The proposed reporting thresholds are far more appropriate to today's market. I believe it could reduce the number of inheritance tax reports that need to be made by as much as 75%, which will significantly reduce compliance costs for advisers and their clients'.
