The plans intend to curb the use of trusts, with HMRC consulting over how to prevent people creating multiple small trusts to slash their inheritance tax (IHT) bills. HMRC say the proposals will:
“ensure fairness in the system”
The worst group hit is likely to be the moderately rich with estates valued up to £2m. Without the planning resources of the wealthiest groups they already shoulder a large IHT burden.
In 2011, the Mirrlees report said that the burden for the middle classes was disproportionate.
Official data released last week showed that estates valued at £1m or more paid 69 per cent of the total £3.4bn accrued in IHT through 2011-12. Advisers have said that conversely, the wealthiest paid comparatively little.
Trusts are a common tool used to manage the passing of assets to beneficiaries. However, they are less popular than they used to be, largely as a result of tougher restrictions, with HMRC figures showing that the number of trusts has fallen by 19 per cent since 2008-9.
Under the plans, individuals would be restricted to placing properties into a single ‘nil rate band’ trust. This has a £325,000 ceiling where no IHT is levied.
Under present rules, HMRC has said, a couple aged between 40 and 75 putting assets into trusts every seven years could shelter up to £3.25m from being taxed. That is five times the value the new rules would allow.
It went on to claim that it would be fairer to those who do not use trusts, rejecting criticism that it would disadvantage those using the facilities to make gifts to loved ones.
HMRC also said that a significant number of respondents to the consultation had objected because the plan:
“unfairly penalises sensible and moderate estate planning which up until now has been acceptable to HMRC”.
Advisers on the proposals expect full implementation of the plans with HMRC saying it will apply the new rules to trusts created after June 6 2014.