IHT – HMRC’s Latest Consultation

HMRC published a consultation document ‘Inheritance tax: A fairer way of calculating trust charges’ on 6 June. It focuses on how the nil rate band should be applied when calculating exit and ten year charges.

This consultation follows two previous consultation documents setting out proposals on how the IHT treatment of relevant property trust charges could be simplified. Two of those proposals, relating to retained income and the alignment of filing and payment dates, are included in the Finance Bill 2014.


Under the existing rules, the nil rate band available to a trust is reduced to take account of other settlements made by the settlor on the same day (related settlements), and any other transactions chargeable to IHT in the seven year period to the date of the settlement.

A common strategy in the past has been for a settlor to set up multiple trusts, usually referred to as pilot trusts, on separate days with a nominal sum in each.  The nil rate band remains available for each trust as the nominal amounts would be covered by annual exemption or gifts from income. As the reduction only applies on the initial settlement, the trusts can be ‘topped-up’ either during lifetime or on death. The main benefit being that each trust retains the full nil rate band for the purposes of exit and ten year charges.  This is often known as the ‘Rysaffe’ principle as it was established in a case of that name in 2003, and is accepted by HMRC as not falling under the GAAR.

HMRC’s proposals

Initially, HMRC suggested that the nil rate band could be split between all relevant property settlements made by the same settlor.  Concerns were raised regarding the practicalities for the trustees ascertaining the available nil rate band and the latest proposal suggests an alternative model for applying the nil-rate band. The new rules would mean that each settlor would be entitled to a ‘settlement’ nil rate band (SNRB), which they could then allocate between settlements they had created.  The SNRB would be separate from their own personal nil rate band.

Application of the proposals

While the initial proposals appeared retrospective in nature, the latest proposals suggest that the new rules would only apply to:

-        new settlements made after 6 June 2014

-        additions of property or funds to existing trusts made after 6 June 2014 or

-        where changes to existing settlements result in property becoming relevant property after 6 June 2014

The actual legislation in respect of the calculation of IHT charges will only come into effect from 6 April 2015, but as an anti-forestalling measure the rules will apply to all trusts created on or after 6 June 2014.

Practical implications

If the proposals are brought into legislation, the creation of pilot trusts under the Rysaffe principle will no longer be effective for IHT purposes.

Settlors will need to allocate their new SNRB to any settlements created on or after 6 June 2014 for the purposes of calculating exit or ten year charges after 6 April 2015.

Trustees will be required to self-assess the tax due and HMRC propose amending form IHT100 to allow for a ‘tax due’ amount to be shown on the return.


HMRC consultations: A fairer way of calculating trust charges.