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Whats New? / New rules for Inheritance Tax on regular gifts out of income
Many people have been worried about a recent announcement in the (catchily named) the Inheritance Tax (Delivery of Accounts) (Excepted Estates) (Amendment) Regulations 2011. At first sight, it looks as if the law has changed and that somehow the facility of making gifts out of income under s21 Inheritance Tax Act 1984 has been curtailed.
Actually, that is not quite what is happening. HMRC have been concerned for some time that the facility under s21 was being abused and in particular that it was being used to shelter gifts into trust. Normally gifts into trust count as “chargeable transfers” and if large enough (individually or cumulatively) they trigger an immediate IHT charge.
The new statutory instrument is not as such a change in the charge to taxation but only in the way that it is reported. The rules come into force on 1st March 2011. Mainly they affect the situation where, on a death, you would not have to deliver an IHT account because the estate was, for some reason or other, not taxable. This would normally mean that it was below the nil-rate band threshold (or below two nil-rates) or going to a spouse and under £1 million.
The main regulations about whether an estate needs an inheritance tax return are the ones in 2004 which set out the categories of estate in respect of which no full account need be delivered. As previously written, the parameters for an excepted estate were satisfied where (amongst other things) a person died who had not made chargeable transfers in the period of 7 years before death exceeding £150,000. It is this that is being changed. From now on, for the purpose of reporting, but not for any other purpose, new gifts will count towards that figure of £150,000. The new regulation says that certain types of gift will be treated as chargeable transfers. These are gifts that:
- in any year exceed £3,000;
- fall in the 7 years prior to death; and
- are exempt only by virtue of s21.
Thus if someone were to die on or after 1st March 2011 who had a relatively small estate which might escape reporting) but who had made substantial gifts out of income, it may become necessary under the new rules to complete the full IHT return where previously that might not have been required.
If you fill in a full return and there have been lifetime gifts, you have to fill in the Schedule of gifts. If you wish to claim relief under s21 you then have to complete, for the 7 years up to death, the normal details of available income and regular expenditure. See the discussion on Motley Fool about this: it is a bit fiddly. Therefore, although the guidance notes refer to these gifts as being treated as chargeable transfer, that means so treated for the purposes of the regulations, not for the purposes of chargeability. The new Regulations do not change the meaning or scope of s21.
The rest of the new Regulations concern changes to take account of the double nil-rate band.
There is another point that has not yet been clarified. It is likely that in future it will become appropriate to report any gifts to be sheltered by s21 on income tax returns from year to year. This makes good sense, both from the point of view of HMRC and the taxpayer. Good professional advisers will keep the records from year to year anyway, or at least advise their clients to do so. It makes life so much easier for the executors. Likewise HMRC, if they have the records, will not feel the need to challenge so many of these cases when they come up. That would also answer the problems aired on Motley Fool.
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