There have been a number of important changes to the taxation of trusts over the last two years and the purpose of this note is to summarise the most relevant. We would also like to update you on changes to the way we arrange the billing of the trusts we manage. Broadly, the tax changes are:
- Trusts where a beneficiary takes an interest at or before 25 (accumulation and maintenance trusts), have in the past received favoured treatment for inheritance tax. From 6 April 2008, where capital does not vest in a beneficiary absolutely at 18, such trusts will now fall into the tax regime that has applied for many years to discretionary trusts. In consequence, a gift into an accumulation and maintenance trust will be taxable at 20% and the trust will face a charge of up to 6% every 10 years and on any capital distributions. This applies to trusts set up before the changes as well as to new accumulation and maintenance trusts (making them much less attractive). Special rules apply where an interest in possession (where someone is entitled to income as of right) arises at 18 and capital vests absolutely at 25; these trusts are known as 18-25 trusts.
- This tax regime will also apply to most new trusts where there is an interest in possession or on a variation to an existing trust so that, again, there will be a 20% inheritance tax charge on the value of assets going into such a trust and similar 10 year and exit charges. There has been an extension in the time allowed for beneficiaries with an entitlement to income existing at 22 March 2006 to gift their interest to someone else (known as a transitional serial interest, or TSI) without incurring the 20% charge. The new deadline is 6 October 2008.
- The rules for filing inheritance tax returns for settlements have changed; many of the returns that have been required in the past will no longer need to be made.
- For 2007/8 the current inheritance tax nil-rate band is £312,000; this will rise to £325,000 in 2009-10 and to £350,000 in 2010/11.
- Indexation and taper relief have been abolished so that capital gains tax is now calculated as 18% of the difference between the 31 March 1982 value (or later acquisition cost) and the sale price.
- The rules relating to the pooling of investments for capital gains tax purposes have also changed. When trustees sell some, but not all, of their shares in a company the identification rules match the shares sold with particular acquisitions in order to calculate the gain (or loss) on the disposal. Previously the rule was that the shares sold were matched with the most recent acquisitions. From now on, all shares of the same class in the same company acquired before the date of disposal will be pooled to form a single asset, to be known as a ‘Section 104’ holding. In a rising market this is likely to mean that the capital gains tax charge on sales of part holdings will be higher.
- The Government is proposing that settlor-interested trusts will have a normal trustees annual exemption rather than being set against the settlor’s personal annual exemption as is the case now. Draft legislation has been published but it is not certainty that it will be enacted in its current form.
- For the tax year ended 5 April 2008 and subsequent years, tax returns filed in paper form must be submitted to HM Revenue & Customs by the following 31 October. If the returns are filed online the deadline for submissions remains the following 31 January. Tax returns for all our trustee clients will be filed online but it is appreciated that beneficiaries who file paper returns may need information earlier than previously and we will liaise with their accountants to ensure it is available in good time.