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Capital Tax Review by Matthew Hutton

Matthew Hutton MA, CTA (fellow), AIIT, TEP reports on an interaction between ‘old’ A&M trusts and the discretionary trust regime that requires clarification from HMRC.

Context

Assume a pre-22 March 2006 accumulation and maintenance settlement which enters the mainstream trust regime from 6 April 2006. Let’s say it was made on 26 December 1986. Apart from ascertaining the settlor’s seven year chargeable transfer total up to 25 December 1986 and whether there were any related settlements, what happens on the first ten-year anniversary under the new regime, that is on 26 December 2016? In fact, under IHTA 1984 s 61 this is the third ten-year anniversary, although no property on the first two ten-year anniversaries will have fallen within the relevant property regime.

IHT will be chargeable under s 64 on the value of the relevant property comprised in the settlement at that time. The rate is found under s 66 (as amended if applicable by s 67 ‘added property’). Calculation of that rate takes into account the seven year chargeable transfers of the hypothetical transferor in the seven years before the settlement – and of course applies the lifetime rates. All that seems pretty straightforward.

However, what happens if there is an ‘exit’ of property before 26 December 2016?

The chargeable amount is fixed under s 65(2) as that by which the relevant property in the settlement is reduced, whether in whole or in part. The rate is found under s 69 ‘rate between ten-year anniversaries’ (s 68 ‘rate before first ten-year anniversary’ not applying). Under s 69(1) this is ‘the appropriate fraction’ (ie depending on the number of quarters that have elapsed since the last anniversary) of the rate at which it was ‘last charged under s 64 (or would have been charged apart from s 66(2))’. This rate ie on the anniversary on 26 December 2006, was of course zero! - regardless of what interpretation is placed on s 66(2).

Is this interpretation suspect because under s 64 no property in 2006 was ‘relevant property’ and therefore the first ten-year anniversary is properly in 2016? Against this, it might be argued that as a positive charge to tax has to be applied not left by implication and the reference to ‘the rate’ in s 69(1) is meaningless, an exit can be made with impunity. But one expects this point to be clarified before long, sadly!

Comment

The easiest way for HMRC to clarify the point would be to add to s 61(3) the qualification that no date falling before 6 April 2008 shall be a ten-year anniversary.

Generally, this illustrates the point that a certain amount of reworking/updating of the 1975 discretionary trust regime may be required to accommodate its extension to all types of settlement (subject to the transitional rules and to very few other exceptions).

Matthew Hutton MA, CTA (fellow), AIIT, TEP
July 2006

More Information

The above article has been taken from Matthew Hutton’s Capital Tax Review, a quarterly update for professional advisers of private clients.

About the Author

Matthew Hutton is a non-practising solicitor (admitted 1979), who has specialised in tax for over 25 years. Having run his own consultancy (latterly through Matthew Hutton Ltd) until 30th September 2000, he now devotes his professional time to writing and lecturing.

THE FIFTH ESTATE PLANNING CONFERENCE: CURRENT ISSUES 2006

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