Update | Wealth management: IHT exemption, vulnerable persons trusts

Draft guidance over a new statutory residence test and the increase of the inheritance tax exemption are just two of a range of signficant changes in the trusts and estates area. There are also others, in force or in the pipeline, which practitioners should keep an eye out for.

Statutory residence test

On 18 December 2012 HMRC published draft guidance on the application of the statutory residence test (SRT) that comes into force on 6 April 2013. HMRC requires comments on the scope and coverage of the guidance by 6 February 2013. The SRT has been produced following two consultations. HMRC will provide an online tool to assist tax payers understand their residence status. However, this will need to be treated with caution. The legislation published on 11 December 2012 may be subject to amendment in 2013.

The new rules will provide an SRT made up of a number of tests. An individual will be resident in the UK for a tax year if they meet an automatic residence test or a ‘sufficient ties’ test. An individual may not meet any of the automatic overseas tests or any of the automatic UK tests but may have enough ties to be sufficient for them to be considered UK resident. The ‘sufficient ties’ test will involve an assessment of ties to the UK through family, accommodation, work, days spent in the UK and whether more time is spent in the UK than elsewhere. This test can also apply to a deceased person. An individual who works full time abroad will be allowed to have up to 30 days working in the UK without losing that status.

There is a fourth automatic overseas test for an individual who died in the tax year under consideration. This provides that the deceased will not have been UK resident for the tax year in which their death occurred, provided:

? they spent fewer than 46 days in the UK during that tax year, and

? they were resident in the UK for tax purposes for neither of the two preceding tax years, or alternatively they were not resident in the UK for tax purposes in the preceding tax year, and the tax year before that was a split year (as defined).

If the deceased person did not meet the above test then you have to consider the automatic UK test for deceased persons. But still note that the first, second and third automatic UK tests can apply to deceased individuals.

Inheritance tax increased exemption

The Finance Bill 2013 will ensure that transfers of value made on or after 6 April 2013 will attract the new lifetime inheritance tax exempt amount that a UK-domiciled individual can transfer to their non-UK domiciled spouse or civil partner.

Since 1982 there has been a lifetime ?cap of £55,000. The specific rules provided that the cap will be increased to the level ?of the prevailing exemption limit at the ?time of the transfer. The cap is designed ?to ensure that assets are not transferred abroad and thereby avoid IHT on their subsequent disposal.

Separately individuals domiciled other than in the UK and who are married or in a civil partnership will be able to elect to be treated as UK domiciled for IHT purposes. The proposals also included an election on death. This must be made within two years of the death of the spouse or civil partner in order to be valid and it is treated as having taken effect from immediately before the death of the spouse or civil partner. The death must have taken place on or after 6 April 2013.

HMRC estimates that the measures will reduce receipts by approximately £5m per annum from 2014-15.

Vulnerable persons trusts

The Finance Bill 2013 will also include a provision to allow disabled people to qualify as beneficiaries of vulnerable persons trusts even if they do not receive the enhanced rate of the new personal independence payment (PIP) daily living component. This replaces Disability Living Allowance from 8 April 2013. It is thought that the changes will add an unnecessarily complex structure.

This will be achieved by changing the definition of a qualifying person to include those in receipt of PIP. They will have an entitlement to the daily living component at either the standard or enhanced rate. The capital and income rules will also be changed so that capital or income is applied for the benefit of the vulnerable beneficiary.

However, trustees will be able to apply small amounts of income and capital without having to prove that it is for the benefit of the vulnerable beneficiary. It is expected that the amount will be the lower of £3,000 or three per cent of the trust fund each year. This will take effect from 8

April 2013.

Currently a qualifying vulnerable beneficiary includes, among others, a person in receipt of DLA by virtue of entitlement to the care component at the higher or middle rate. Conditions apply to the application of capital and income. For some new trusts established from April 2013 the change in definition may have a direct impact on the settlor and trustees and an indirect impact on the beneficiary. To the extent that the beneficiary meets the current qualifying conditions but not the replacement conditions there will be a negative impact; inheritance tax may become payable for those affected by the change, and capital gains tax and income tax advantages may be unavailable. Very few of these trusts set up each year will be affected by the change.

A person becomes entitled to claim a personal independence payment if they are aged 16-64 and satisfy the daily living or mobility activities test for three months prior to claiming and be likely to continue to satisfy this test for a period of at least nine months after claiming.

IHT forms and processes

On 13 November 2012 HMRC updated forms IHT400, IHT404, IHT421, IOV2, and the IHT 400 Notes to reflect the reduced rate of tax and at the same HMRC provided a new schedule IHT430 for claims for the new rate of inheritance tax.
There is also a reduced rate calculator ?on their website.

In respect of estates where the only outstanding matters to be dealt with are ?the tax treatment of a Home Loan or ?double trust schemes HMRC will now provide an estimate of the tax that might ?be payable should litigation find in HMRC’s favour. This enables the executors to make a payment on account of potential tax.

Inheritance tax receipts rose by seven ?per cent to £2.91 billion in the 2011-12 tax year and the number of estates liable to ?IHT increased by 18 per cent to 20,000. ?The Budget will take place on Wednesday 20 March.