New dawn for IHT

When the inheritance tax trust changes were introduced in March 2006, many more lifetime transfers became chargeable lifetime transfers instead of potentially exempt transfers.

This is because lifetime transfers to most trusts became chargeable lifetime transfers. The only exceptions are now lifetime transfers to bare (absolute) trusts and to trusts for "vulnerable" beneficiaries which are still potentially exempt transfers.

The main type of trust affected by the changes is interest in possession trusts with power of appointment where lifetime transfers into these trusts became chargeable lifetime transfers from 22 March 2006. Most life assurance policies effected subject to trust prior to the changes used this type of trust so it is planning involving these assets which is greatly affected. This included single premium bonds effected subject to trust – including, of course, many of the lump sum IHT plans on the market. Interesting references are made by HMRC in the rules for discounted gift schemes.

A problem with the tax changes to trusts is that chargeable lifetime transfers, in general, have to be reported to Her Majesty's Revenue and Customs subject to certain monetary limits on Form IHT 100 and, possibly, supplementary forms. These limits used to be very small with the result that the creation of many trusts on or after 22 March 2006 became reportable. This was a great inconvenience to the individuals creating these trusts and to advisers. It also greatly increased the workload at HMRC with all the excess paperwork.

Much consultation took place as to how, and by how much, to increase the limits to reduce the reporting burden and this culminated in new regulations which were announced by HMRC on 3 March this year. The really good news is that the new regulations apply to all chargeable lifetime transfers made on or after 6 April 2007.

So, what were the previous limits and how have they changed?

For chargeable lifetime transfers made before 6 April 2007 an IHT 100 did not need to be filled in where the amount of the chargeable lifetime transfer, and any other chargeable lifetime transfers made by an individual in the same tax year, did not exceed £10,000 and the amount of the chargeable lifetime transfer and any other chargeable lifetime transfer made by an individual in ten years ending with the date of the chargeable lifetime transfer did not exceed £40,000.

These rules, although quite mean, did have the benefit at least of being fairly simple.

The rules for chargeable lifetime transfers made on or after 6 April 2007 are much more generous but they do appear to be quite complex. They can be found in full by going to the HMRC website, referring to the IHT manual and looking up IHTM06101 onwards.