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A moment of Clarity

Inheritance tax compliance and offshore trusts


In the lifetime of a trust there are various events that trigger an inheritance tax event. In the case of offshore trusts this is relevant if there are UK situs assets or the settlor is domiciled within the United Kingdom. Changes taking effect from 6 April 2017 will cause many trusts to be treated as having UK situs assets or to have UK domiciled settlors for the first time.

There are various reporting exemption thresholds for UK trusts but where there is an offshore element these exemptions do not apply and a full report must be made to HM Revenue & Customs.

The reporting events are:.

  1. When a capital distribution is made from the trust, also known as a proportionate charge.
  2. On each ten year anniversary of the creation of the trust, also known as a periodic charge.
  3. On the termination of the trust (this is effectively a capital distribution/proportionate charge).

When a trust becomes subject to UK tax it will fall into the Relevant Property Regime for Inheritance Tax purposes and therefore a report must be made at the subsequent ten year anniversaries. The ten year anniversary date is taken from the original settlement date and not the date the trust became relevant property.

The assets held in the trust are re-valued at the ten year anniversary and this determines the rate for any capital distributions in the subsequent ten years. The rate of tax at the ten year anniversary is a maximum of 6% of the value of the UK situs assets. The full calculation can be quite complex and care should be taken.

The Inheritance Tax nil-rate-band used when calculating a ten year anniversary is restricted by the total number of capital distributions made in the previous ten years. This is to discourage trustees from making large distributions prior to a ten year anniversary to avoid or significantly reduce the Inheritance Tax charge. .

There may be circumstances whereby it is favourable to wind up a trust prior to the ten year anniversary; conversely, as the rate of tax is determined using the value at the last ten year anniversary it is possible, albeit very unlikely, that it could be beneficial to revalue the assets for inheritance tax purposes at the ten year anniversary and then wind a trust up in the three months following a ten year anniversary. The significance of three months is because the Inheritance Tax is calculated on the number of quarters the property was relevant property since the last ten year anniversary. Therefore, the trustees may wish to prepare “what if” calculations prior to the event to determine the best course of action from an Inheritance Tax perspective.

The submission deadline for an Inheritance Tax return reporting a ten year anniversary or a capital distribution is 6 months after the end of the month in which the event occurred i.e. if the ten year anniversary was on 15 May then the return is due to be submitted by 30 November. The payment of any liability is due on the same date. The method of reporting is via tax form IHT100 (and any relevant supplementary pages). Late returns have penalties which start at £100 and can increase up to £3,000, if the return is unprompted by HMRC. However, if the return has been requested by HMRC and the trustees have concealed information then the penalty starts at £1,000 and can increase to the value of the tax due.

March 2017

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