In association with

SUCCESSION TAXES VOICE Issue 01 – April 2016

Succession Taxes Voice | Issue 01 | April 2016 2

Welcome ................................................................................................................... 3

The non-dom conundrum?........................................................................................ 6

Edward Emblem addresses the question: How does one go about long-term tax planning when a tax change has

been announced but the details are yet to materialise?

Loans and Debts ........................................................................................................ 8

Gary Heynes and Kristina Volodeva consider the various issues surrounding the use of loans and debts in estate

planning for non-UK domiciled individuals and the impact of recent changes in the area

Business Inheritance tax and trusts: where are we now ......................................... 11

Harriet Brown provides an answer to the question so many have asked

Residence Nil Rate Band: an outline ....................................................................... 14

Allan Holmes guides us through some key issues regarding the Enhanced Nil Rate Band for residential property

Your new Succession Taxes Voice ........................................................................... 17

Consultations and submissions ............................................................................... 18

Events ..................................................................................................................... 20

Contact us ............................................................................................................... 21

Succession Taxes Voice

Issue 01 – April 2016

CONTENTS

Succession Taxes Voice | Issue 01 | April 2016 3

WELCOME

A little less voluntary

Former Chancellor of the Exchequer, Roy Jenkins, famously said that “Inheritance

tax is a voluntary levy paid by those who distrust their heirs more than they dislike

the taxman.” Like him or not the taxman now seems determined to do something

about reducing the voluntary aspects of IHT. Of course IHT was never truly

completely voluntary but for many years it sat undisturbed in its own sheltered

little backwater, largely undisturbed by the gathering storms of anti-avoidance

measures, contributing barely one per cent of the national tax take, and the

authorities seemed content to let it lie there. But then came the increases in

property values of the nineties and noughties, leading to calls for the nil-rate

band,which had also been neglected, to be increased in line with house price

inflation, rather than RPI or CPI. Perhaps this rang a small bell in the Treasury: if

enough taxpayers were concerned about paying more IHT there must be more IHT

to be collected and as the appetite for IHT avoidance arrangements grew so did

Government’s hunger for a slice of the cake. The first sign of a shift came with new

anti-avoidance measures in the mid noughties with counter measures against

purchased interests in excluded property trusts of thesort covered in Edward

Emblem’s article. Then came the pre-owned assets tax- POAT, designed to stem the

tide of arrangements designed to save assets, mainly private residences but

investments too, being shifted out of individuals’ estates while remaining available

for their benefit – but a benefit falling outside the gift with reservation of benefit

provisions. And despite the efforts (best or worst- opinion is divided and the CIOT is

neutral) of tax planners, the Government’s IHT ‘take’ continued to grow in cash

terms and as a proportion of total revenues.

Then the penny, or krugerrand, dropped: if IHT was worth avoiding by those

minded to, yet still turning into a money-spinner too, maybe it was time to get

serious about ramping-up enforcement. Throw in a desperate need to raise

revenue outside the restrictions of tax-locks and a political climate hostile to non-

doms, tax avoidance and in particular tax-avoiding non-doms and the time was ripe

for some serious moves to increase the IHT take.

Brian Slater Chairman Property Taxes Sub-Committee

Chris Williams Chair, Succession Taxes Sub-Committee Chris is the Private Client Technical Officer at Mazars LLP. Chris is a technical writer and adviser on all aspects of private client work and can be contacted at chris.williams@mazars.co.uk or by telephone: +441512372213

Succession Taxes Voice | Issue 01 | April 2016 4

The changing landscape

Changes in recent years include:

curtailment of the usefulness of loans in IHT

planning, as dealt with by Gary and Kristina;

ending the long-recognised anomaly that

allowed a settlor to create multiple ‘pilot’

trusts, each with its own nil-rate band – see

Harriet’s article;

further tightening of the deemed domicile

rules by aligning them with income tax and

capital gains tax in a new common deemed

domicile régime which will diminish the

attraction of excluded property trusts,

covered by Ed; and

the tight constraints on the new residence nil-

rate band which, as Allan’s article makes

clear, is not as simpleas the increase in the

IHT threshold it is made out to be.

DOTAS – the hallmark of a tax taken seriously

Finally we have the full extension of the now long-

established disclosure of tax avoidance schemes

(DOTAS) rules to IHT.

IHT avoidance schemes involving confidentiality

clauses or premium fees have been within DOTAS

since 23 February this year and a further hallmark

would have been brought in too, but for the fact that

in its forst proposed form it was rejected as too wide-

ranging and unfit for purpose. In its original form its

scope could have treated simple gifts, the simplest of

plain vanilla transactions, as potentially notifiable

under DOTAS. Fortunately, HMRC has listened to the

criticisms of that hallmark and largely abandoned the

most contentious aspects of the new hallmark but

although the new proposals in the consultation

documenton disclosure of tax avoidance schemes for

indirect taxes and IHT (http://tinyurl.com/condoc-tax-

avoid), issued on 16 April 2016,demonstrate a better

understanding of the issues in IHT, they are still

attracting criticism due to the breadth of their

potential scope which could still, unless carefully

managed and more clearly defined, result in some

plain vanilla arrangements being brought into DOTAS.

Estate planning is more tutti frutti than plain vanilla

To a certain extent the problems presented by IHT

derive from the structure of the tax and the

arrangements potentially affected. IHT is the tax with

the longest lead time between arrangements being

made and taking effect: a will may be signed and then

forgotten for decades, in which time both the make-

up of the estate it governs, and tax law may change

out of all recognition before the testator dies, while a

trust can have a lifespan of up to 125 years under the

present perpetuity rules.

The DOTAS conditions and how they will be applied

Turning back to the changes being made to the

hallmarks, the following observations may be made:

Condition 1 “the main purpose, or one of the main

purposes, of the arrangements is to enable a person

to obtain a tax advantage” is uncontroversial in the

present day and age.

Condition 2 “the arrangements are contrived or

abnormal or involve one or more contrived or

abnormal steps without which a tax advantage could

not be obtained” is largely based on the

Government’s original proposal for Condition 3 with

some wording changes (the contentious original

Condition 2 having been dropped altogether). How

Condition 2 will apply will depend on how HMRC and

the Tribunals interpret the phrase “contrived or

abnormal”. “Contrived” connotes artificiality and so

may be thought of as less contentious than

“abnormal” but both words have a breadth of

meaning that extends far beyond tax. In the realm of

Succession Taxes Voice | Issue 01 | April 2016 5

succession planning it can be more difficult to pin

down what is normal than what is not as testators and

settlors of trusts are often more concerned with

retaining control over assets for reasons that, as the

late Mr. Jenkins observed, have nothing to do with

personal benefit but reflect their creators’ wishes to

protect future generations interests, the integrity of

particular property such as estates, in the real

property sense of the word, and the devolved assets

themselves from the depredations of rogues and the

feuds and follies of the beneficiaries.

Therefore wills and trusts may often contain

provisions that are contrived or abnormal for non-tax

reasons but which may lead to a tax advantage. The

weakness of the proposed Condition 2 is that it

contains no hint of a purposive test, i.e. that to the

informed observer the steps:

are contrived or abnormal;

contribute to a tax advantage being

obtained; and

have the avoidance of tax as the sole, or a

main purpose.

The informed observer test

The hallmarks depend on arrangements appearing to

an “informed observer” to meet the conditions.

HMRC’s view is that an informed observer is someone

who is independent and has knowledge of the Taxes

Acts “such as the Tribunal”. But this is not enshrined

in the proposed statutory instrument and so there is

no guarantee that in future HMRC’s interpretation

might not suffer from mission creep.

What is needed is that the “contrived or abnormal”

test be qualified in the regulations by restriction to

the context of IHT.

‘Ordinary’ tax planning

However, there is, at least, clear acknowledgement in

the revised consultation document that ‘ordinary’ tax

planning arrangements will not need to be disclosed,

with a few examples cited and the promise of high

level examples being given in the revised DOTAS

guidance to add clarity. It is explicitly stated that tax

planning arrangements whilst making or amending a

will (e.g. gifts into trust to use up the nil rate band of

the settlor) do not need to be disclosed. Neither, for

example, should outright gifts which use statutory

reliefs, or an investment decision which takes into

account the availability of business or agricultural

property relief, provided there were no contrived or

abnormal steps to secure those reliefs.

A number of common arrangements will also be

specifically excepted from the disclosure requirement:

loan trusts

discounted gift scheme

flexible reversionary trusts

split or retained interest trusts.

In contrast, disclosure will be required for home loan

schemes, where donors give away the family home

whilst retaining a benefit, as this is likely to breach the

gift with reservation of benefit rule.

When will the results be known?

The consultation closes on 13 July 2016 and will then

lead to amendments to the DOTAS Hallmark

Regulations. Therefore they do not depend on

Parliament being in session and may appear during

the Summer Recess. In the past changes to DOTAS

regulations have been issued as soon as they were

ready as they are not tax year-specific.

Chris Williams

Successions Tax Sub-Committee Chair

Succession Taxes Voice | Issue 01 | April 2016 6

THE NON-DOM

CONUNDRUM?

Edward Emblem addresses the question: How

does one go about long-term tax planning when

a tax change has been announced but the details

are yet to materialise?

We only currently know some of the measures

affecting non-doms due to be introduced from April

2017, but some individuals are keen to know now

how they should plan for the new regime in the long

term.

What has been produced to date still represents only

fragments of the necessary legislation. We are far

from having answers to a whole number of questions

around how the affairs of many individuals will be

affected from next April. What, then, can be done in

the meantime to protect family wealth and secure the

best position in light of the little we know?

Areas of reasonable certainty

Draft legislation has been published detailing the new

deemed domicile rules for income tax and capital

gains tax that will now appear in Finance Bill 2017

rather than 2016, potentially giving scope for

amendments in the interim. The clauses as currently

drafted mean that individuals born in the UK with a

domicile of origin in the UK who return to the UK will

be deemed domiciled, and therefore unable to access

the remittance basis from the year of return. All

individuals will be deemed domiciled once they have

been resident in the UK for more than 15 out of the

previous 20 years.

The 15 year rule will also apply for IHT deemed

domicile, in some cases, significantly accelerating the

point at which individuals will become IHT deemed

domiciled. Take as an example, Henrik, a non-

domiciled individual who was tax resident in the UK

for twenty years before recently having spent a period

of five years overseas. He has now returned and

thinks he will not have to worry about his overseas

assets coming within the scope of UK IHT for years.

Clearly, it may well be that he will now only have a

year before his worldwide estate becomes potentially

exposed.

Many of the usual planning tools will still be available

for those due to become deemed domiciled, with

excluded property structures still expected to retain

their merits for IHT purposes other than for UK

residential property. Whilst there is still uncertainty

around the taxation of offshore trusts under the new

rules, UK resident excluded property settlements may

be of interest to some. Pensions, offshore bonds and

family investment companies will all still be worth

considering and, may offer not only IHT protection,

but also help counter income tax and CGT

disadvantages where the remittance basis is no longer

available from 2017.

Some of those who will become deemed domiciled

from April 2017 may be able to arrange for foreign

income to be received prior to that date whilst they

are still taxed on the remittance basis. Taking

dividends from non UK companies, terminating

offshore deposits, selling offshore deep discount

securities or bonds heavy with accrued interest may

all be on the list of possible options. Every case will

need to be judged on its merits.

It is worth noting that individuals such as Henrik, who

recently spent five tax years abroad, may have a

limited period in which they can spend only a single

year overseas and in doing so, effectively restart their

domicile clock for tax purposes.

Succession Taxes Voice | Issue 01 | April 2016 7

Less certain areas

We have multiple assurances that there will be some

form of rebasing for those who find themselves

deemed domiciled from April 2017. This should give

comfort for many, depending on exactly how the

measure works. Some will find themselves in a

position where the IHT advantage of settling assets

into trust prior to April 2017 will have to be weighed

against the potential loss of CGT uplift. Other

countries’ taxes may, as ever, need to be considered.

Assurances have also been given that protection will

be available where an offshore trust has been settled

before the point of becoming deemed domiciled, with

the effect that income and gains within the trust will

remain untaxed unless paid out to a UK resident

beneficiary. Such trusts could theoretically be a useful

vehicle for the future tax-efficient accumulation of

wealth if the individual or their family intend to be

non-UK resident at the point they receive a future

benefit or if a benefit is taken later in life, which may

allow for the deferral of tax. It may also be possible

for the first time for UK resident settlors not to have

to be excluded from benefit without s.624 ITTOIA

(settlor interested trust) or s.720 ITA 2007 (transfer of

assets abroad) coming into play, but we will need to

wait to see the mechanics of the proposed regime

first.

What is also unknown is how distributions from

offshore trusts will be treated. This will be an

important factor for many wishing to settle assets

prior to becoming deemed domiciled, at least to the

extent they wish UK resident individuals to benefit.

General Law

Finally, the new landscape may make it more

important to assess taxpayers’ actual domicile under

general law, before undertaking any planning on the

basis they are non-deemed domiciled for tax

purposes. This is not to say that the 15 year point will

automatically become some sort of flag for HMRC to

indicate a possible actual UK domicile.

Interestingly, the perception amongst some of the

general public seems to be that it will be one’s non-

domicile status as such that will cease after 15 years

of UK residence. Whilst advisers know this is not

strictly true, we need to ensure we do not focus so

much on the forthcoming tax provisions that we lose

sight of the general law that will continue to underlie

it.

Profile

Edward Emblem is a Director in the Private Client Tax

Services department at Smith & Williamson and a core

member of the CIOT’s Succession Taxes technical sub-

group. He advises on all areas of personal taxation

and may be contacted at 01483 407139 or

Edward.emblem@smith.williamson.co.uk

Succession Taxes Voice | Issue 01 | April 2016 8

LOANS AND DEBTS

Gary Heynes and Kristina Volodeva consider the

various issues surrounding the use of loans and debts

in estate planning for non-UK domiciled individuals

and the impact of recent changes in the area

A quick recap

Domicile and the situs of assets are the only factors in

determining an individual’s liability to UK inheritance

tax (“IHT”).

As a result, the situs of an asset is a major factor for

UK IHT; determining it though is not always

straightforward and is generally done by reference to

statute, case law and sometimes double taxation

agreements. As a general rule, assets located in the

UK are subject to UK IHT, both on death and in case of

certain lifetime transfers, regardless of the domicile

position of the owner. Non-UK situs assets are

‘excluded property’ for UK IHT purposes, meaning

that they are outside the tax net, if owned by non-UK

domiciled (actual or deemed) individuals (“non-

doms”). Foreign situs assets settled on trust by a non-

dom can be permanently excluded from UK IHT.

While the situs of most real assets can be determined

relatively straightforwardly by their location,

intangible assets create more of a problem. Shares are

normally sited where they are registered or listed,

bonds by where they have been issued and

intermediated securities may require consideration of

whether they are opaque or transparent to determine

whether to look at the security itself or the underlying

assets.

Debts

Debts normally follow the situs of the debtor – the

one who owes the debt. However, the situs of a

‘specialty debt’ – a debt under deed that needs to be

formally signed, witnessed, delivered and is then

enforceable by action – has historically been

determined by reference to the physical location of

the deed. This meant that keeping the deed outside

the UK resulted in debt being foreign property, even if

the debtor is resident in the UK. This could be very

useful for a UK resident, non-dom because a debt they

owe could be sited in the UK if they are resident but

under Speciality would be excluded property (until

they become domiciled – either actual or deemed).

Specialty debts settled by non-UK domiciliaries on

trusts would also be ‘excluded property’ and as such

not be subject to trust IHT periodic charges (on each

ten year anniversary and on exit), potentially

permanently.

On this basis, therefore, specialty debts historically

constituted a commonly used, effective method of

mitigating the non-doms’ and trustees UK IHT

exposure.

But then…

The above tax treatment of specialty debts stemmed

from long-established legal practice and case law and

HM Revenue & Customs (“HMRC”) guidance.

However, in 2013 HMRC made an unexpected U-turn

on their views, updating their practice manuals to

advise that judging a specialty debt by its deed’s

location “may not be the correct approach in all cases”

and such debts “are likely to be located” in the

country of residence of the debtor (since January

2013), thus effectively downgrading a specialty debt

to a simple contract debt, or the location of the

collateral for the debt (since October 2013).

Succession Taxes Voice | Issue 01 | April 2016 9

HMRC taking this position means that the previously

afforded excluded property status would no longer be

available to non-doms holding specialty debts outright

if secured on UK property or issued to a UK resident.

Trustees with loans extended to UK resident

beneficiaries could be deemed to be holding UK assets

and have UK tax payment and reporting

requirements.

Current state of play

The changes, both unexpected and seemingly

unsubstantiated by either legal or technical analyses,

does not seem to be ones about which HMRC are too

certain either – the use of ‘may’ in the guidance is

somewhat of a giveaway and the promise to produce

something tangible to cement the ‘new and improved’

views on specialty debts has never materialised. This

revised approach has been somewhat mentioned

through the FA 2013 amendments made to section

874 (6A) Income Taxes Act (“ITA”) 2007: “no account

is to be taken of the location of any deed” for

determining whether withholding tax should be

operated on loan interest payments. However, no

matter-specific commentary followed thus far, despite

the clearly intended substantial impact the revised

approach would have on individuals and trusts alike as

well as requests for clarification and definitive

comments and concerns voiced by tax and legal

practitioners, STEP and ICAEW. Unscathed, HMRC for

now seem to be just planning to refer all cases

involving specialty debts to their Technical team.

As such, until and unless there is a precedent case, we

are unlikely to know how the theoretical changes will

apply in practice – and more importantly, from which

point. It remains to be seen whether HMRC would

seek to apply the change in views retrospectively,

which begs the question as to whether legitimate

expectation by those who have entered the previously

unfrowned upon arrangements in good faith is

sufficient protection from all but from the taxman.

And also…

In a further move to restrict the use of debts in estate

planning, new rules on the deductibility of loans in

calculating the value of estate or lifetime transfers for

IHT purposes were introduced with effect from 17 July

2013, negating, in the majority of cases, tax relief for

loans secured on UK assets but used to finance,

directly or indirectly, the acquisition or maintenance

of ‘excluded property’ or ‘relievable property’ (assets

qualifying for Agricultural Property, Business Property

or woodlands Reliefs) unless certain conditions are

met. Traditionally, the position has been that the

value of assets can be reduced by the value of the

outstanding liabilities, including any mortgages and

family loans, when calculating the taxable base for

IHT. The newly introduced restrictions can clearly

have a substantial impact on those with complex or

high value loan arrangements in place.

What now?

The practical reality is that specialty debts are an

established category of formal contract in common

law that has been in existence for many years and

entering such arrangements may not always be a

result of only the overwhelming desire to mitigate IHT

exposure that HMRC believe has penetrated the non-

dom society. With regards to deductibility of loans, it

may not always be possible to get an advance other

than by securing it on personal assets – consider an

owner of a struggling trading company who can only

get cash from the bank by offering personal assets as

collateral – would any relief be due to him in case of

an unfortunate event?

Given the changes in HMRC views, those individuals

and trusts that have arrangements involving debts in

place should exercise caution – whilst the position

Succession Taxes Voice | Issue 01 | April 2016 10

overall remains questionable in absence of any

specific legislation, reviewing and restructuring should

be considered. To the extent that no action is

deemed possible or worthwhile, it is crucial to ensure

that the existence of the arrangements is

appropriately and fully reported – if only as a means

of protection against a discovery assessment should

HMRC choose to press rewind.

Profile

Gary Heynes is a partner and Head of Private Client

for RSM in the UK. He has over 20 years of private

client experience, a significant part of which has been

gained in dealing with non-UK domiciled individuals

and their overseas structures.

Gary is an Associate of the Chartered Institute of

Taxation. Gary can be contacted at +44 (0)844

2640300 or by e-mail at gary.heynes@rsmuk.com.

Kristina is an Associate Director with RSM in the

Private Clients Tax team in London and both provides

UK tax advice and looks after UK tax compliance for a

number of clients, ranging from entrepreneurs and

private equity executives to wealthy families, most of

them with complex asset ownership structures and an

international angle to their affairs.

She has extensive experience in advising non-UK

domiciled individuals moving to the UK (with a focus

on those coming from Russia and CIS) on how to

arrange their affairs in a UK tax friendly manner.

Kristina can be contacted at +44 (0)20 3201 8776 or

by e-mail kristina.volodeva@rsmuk.com.

Succession Taxes Voice | Issue 01 | April 2016 11

BUSINESS

INHERITANCE TAX

AND TRUSTS:

WHERE ARE WE

NOW?

Harriet Brown provides an answer to the question so

many have asked

Introduction

Since 2006 the use of trusts in inheritance tax

planning has become progressively more difficult, and

less beneficial. This does not, however, mean that

trusts are useless in inheritance tax planning. In this

article I discuss some of the ways that trusts can still

be useful.

Qualifying Interests In Possession

The benefit of a discretionary trust would, absent the

provisions of the Inheritance Tax Act 1984 ("IHTA"), be

that property in it should not form part of any

individuals estate. IHTA deals with this in two ways:

the relevant property regime (which applies charges

to property held in many types of trust on the tenth

anniversary of the trust and when property leaves the

trust) and through treating property in which there is

a qualifying "interest in possession" ("IIP") as forming

part of the estate of the person beneficially entitled to

it.

A trust that has a qualifying IIP in it should not be

within the relevant property regime. The major

change in 2006 was that the categories of qualifying

interests in possession were significantly cut down.

The following now constitute the main categories of

qualifying IIPs:

those to which an individual became beneficially

entitled before 22nd March 2006;

an immediate post-death interest;

a disabled person's interest; and

a transitional serial interest.

Thus in most cases, it is no longer possible to create a

new interest in possession, and this means that the

majority of trusts will come within the relevant

property regime. Immediate post death interest trusts

(IPDIs) are IIPs that are in a settlement effected by will

or intestacy, the holder of the interest became

beneficially entitled to the interest in possession on

the death of the testator/intestate, section 71A (trusts

for bereaved minors) does not apply to the property

in which the interest subsists, the interest is not a

disabled person's interest, and the last condition has

been satisfied at all times since the holder of the

interest became beneficially entitled to the interest in

possession. Thus it remains possible to create an IPDI.

Both a disabled person's interest and a transitional

serial interest arise as a matter of circumstances and

so while they remain useful in situations where these

circumstances exist, they are not useful in planning

more generally.

Thus trusts in general planning are no longer as useful

as they were previously.

Pilot Trusts

While trusts have long been used in succession

planning and for many other reasons where tax is not

the primary driver behind the trust, trusts have also

been used in more aggressive tax planning and tax

avoidance. One such usage was that of pilot trusts.

Succession Taxes Voice | Issue 01 | April 2016 12

Under the previous rules for taxation of relevant

property trusts the calculation of periodic and exit

charges on trust property took into account the

settlor’s aggregated chargeable transfers in the seven

years prior to (but not on) the date of commencement

(IHTA 1984, s. 66(5)). Where, however, property was

added to a settlement at a later date, the aggregated

chargeable transfers taken into account was those

falling in the seven years prior to (but not on) the date

of the addition when that is greater (IHTA 1984, s.

67(3)(a)).

Pilot trusts exploited these provisions because where

property was added to two or more existing

settlements on the same day, those additions were

not taken into account for the purpose of calculating

the aggregate chargeable transfers on the others

(IHTA 1984, s. 67(3)(b)(i)). Therefore subsequent

charges were calculated without reference to same-

day additions. The additions were not brought into

account as “related settlements” under IHTA 1984, s.

62, because the settlements commenced on an earlier

date.

IHTA, section 62A – 62C (inserted by the Finance (No.

2 Act) 2015) have addressed this means of planning.

These provisions introduce rules to ensure that where

property is added to two or more settlements on the

same day and after the commencement of those

settlements, the value of the added property together

with the value of property settled at the date of

commencement (that is not already in a related

settlement) will be brought into account in

calculating:

the rate of tax for the purposes of ten year

charges under section 66;

©Shutterstock/enciktepstudio

Succession Taxes Voice | Issue 01 | April 2016 13

for exit charges before the first ten-year

anniversary under section 68; and

for exit charges between anniversaries under

section 69 for and for the charge on 18/25 trusts

under section 71F.

While there are some exceptions to the new

aggregation rules in IHTA, sections 62B and 62C

(which protects certain settlements that commenced

before 10 December 2014 from the new rules), the

opportunities to use pilot trusts to avoid or reduce

inheritance tax have been greatly reduced.

Foreign-Domiciled Settlors

One way in which trusts remain useful is for foreign

domiciled settlors. This is because property that is not

situated in the UK and which was settled at a time

when the settlor was not domiciled in any part of the

UK, will be outside the relevant property regime. Thus

offshore trusts used to hold non-UK situate property

that is settled by non-UK domiciled settlors still

provide an opportunity to reduce charges to

inheritance tax.

The downsides to using such trusts tend, however, to

come from taxes other than inheritance tax. In

practice such trusts are created during the settlor's

lifetime – rather than on death – and consequently,

there is a number of potential difficulties with the

settlor or the settlor's family accessing the property in

the trust. Such issues include the transfer of assets

abroad regime in the Income Tax Act 2007, Part 13,

the charges arising under the Taxation of Chargeable

Gains Act 1992, sections 86 and 87 and (possibly)

making remittances where the remittance basis is in

point.

This should not act as a deterrent to the use of trusts

in the case of a foreign domiciled settlor, but

competent advice should always be taken when

dealing with such trusts.

Finally, in this respect, it is important to remember

the rules for deemed domicile (IHTA, section 267) and

that the proposed introduction of deemed domicile

rules for income tax, is also intended to amend the

inheritance tax deemed domicile rules and

consequently, whether or not someone is deemed

domiciled in the UK for inheritance tax purposes will

also require careful consideration.

Profile

Harriet advises taxpayers in relation to UK tax

matters. She advises on all direct tax matters for

private and corporate clients as well as in the context

of trusts and estates, and on indirect tax matters. In

addition to advising extensively on traditional private

client matters, Harriet has a particular interest in

international matters such as double tax treaties,

TIEAs, disclosure facilities and conflict of laws issues

arising in a tax context. Harriet can be contacted at

harrietbrown@15oldsquare.co.uk or on +44 ((020)

7242 2744.

Succession Taxes Voice | Issue 01 | April 2016 14

RESIDENCE NIL RATE

BAND: AN OUTLINE

Allan Holmes guides us through some key issues

regarding the Enhanced Nil Rate Band for residential

property

Introduction

The Conservative party 2015 election manifesto

stated that it would “take the family home out of tax

by increasing the effective Inheritance Tax threshold

for married couples and civil partners to £1 million”.

The Chancellor duly announced proposals to bring

into force the election pledge in the Summer Budget

2015 and the provisions were duly enacted in Finance

(No 2) Act 2015. The Government is expecting the

legislation to cost approximately £980 million per year

when the maximum relief is introduced in 2020/21,

that is almost £2.5 billion of residential property value

predicted to move outside of the IHT net!

In this article I look at some of the key aspects of the

legislation and the direct issues which need to be

considered going forward. I then recap IHT planning in

relation to UK residential property and the potential

impact of the legislation.

Key provisions

The legislation introducing the residence nil rate

amount (RNRA) is effectively bolted on to the existing

legislation for the nil rate band and the transferrable

nil rate band (s8D –s8M IHTA1984). It is beyond the

scope of this article to set out a detailed analysis of

the legislation (there is not enough space!) but as you

will see it is extremely complex with some difficult

areas.

The main points to be aware of are as follows

The relief applies to residential property

which is included in an individual’s estate on

death and which is bequeathed to children

and descendants (including step children) and

/or their spouses.

The property must pass into the estate of the

descendant or onto a favoured trust for their

benefit i.e. to them outright or onto an

Immediate Post Death Interest, Bereaved

Minor, 18-25 or Disabled Persons trust.

The residential property must have been

occupied by the individual as a residence at

some time but does not need to have been

their main residence. It is possible to choose

which property obtains the relief via an

election.

The legislation will apply to deaths from 6

April 2017.

The relief is in the form of an “enhancement”

of the nil rate band available on death and is

used in priority to any other elements of the

nil rate band (ordinary nil rate band or

transferred nil rate band).

The maximum relief starts at £100,000

(2017/18) then rises by £25,000 per year until

it reaches a maximum of £175,000 for

2020/21.

Whilst the relief is calculated by reference to

the value of the residential property

transferred on death, it is applied across all of

the chargeable estate.

Unused relief can be transferred to a surviving

spouse or civil partner on a claim.

For deaths prior to 6 April 2017 the surviving

spouse will be able to claim the deceased

persons RNRA (as it would have been

impossible for them to use it). The deceased

does not need to have owned a property.

Succession Taxes Voice | Issue 01 | April 2016 15

The £1 million inheritance tax threshold is

reached by 2X NRB of £325,000 plus 2x RNRA

of £175,000.

The relief is withdrawn by £1 for every £2 the

estate exceeds £2m – so for an individual it is

lost after £2.35 million (£2.7 million for a

surviving spouse). The estate is calculated

before reliefs such as BPR and APR.

Additional legislation will ensure that an

individual who downsizes in later life is not

disadvantaged.

The legislation contains a number of

definitions and formulae which require

extremely careful navigation.

Planning around the legislation

Legislation of this complexity will take some time to

bed in and even though the relief does not come into

force for another year it needs to be considered now,

in particular in relation to will drafting and in

situations where one spouse may die before 6 April

2017.

I am sure that there will be further aspects of the

legislation to focus on but some initial points are as

follows:

It only apples to transfers of qualifying

residential property on death to qualifying

descendants – so property gifted just before

death cannot qualify.

The restriction of the amount of relief applies

by reference to the value of the estate on

death; it does not include failed PETs so gifts

pre death of other assets may be a good idea.

Property identification will be important as if

the property was never used as a residence by

the deceased the relief is not available. It will

also be necessary to ensure that there is

©Shutterstock/Vadim Georgiev

©Shutterstock/Vadim Georgiev

Succession Taxes Voice | Issue 01 | April 2016 16

sufficient evidence to prove that the property

was occupied by the deceased as a residence.

The RNRA is not available on transfers to

relevant property trusts.

The likely value of the estate of the surviving

spouse needs to be considered, there is no

point passing all of the deceased’s assets to

the spouse and with it the full RNRA if the

spouse is likely to have a combined estate on

death greater than £2.7 million.

Gifts with reservation of benefit WILL qualify

for the relief as the value will be included in

the estate of the deceased.

The time limits for claiming the deceased

spouse allowance will need to be carefully

monitored.

Will drafting is now much more complicated

as it will be necessary to factor in the RNRA

and ensure that there is a qualifying property

to leave to a descendant.

Effect on existing planning

Estate planning around the family home has always

been difficult and there are few effective planning

ideas around. A number of individuals have planned

via a gift of their residence and the payment of rent

but there are income tax and capital gains tax

downsides. This is likely to become less popular as a)

for many people it will be unnecessary and b) it may

result in loss of the RNRA. Others have based their

planning on the exemption from the reservation of

benefit provisions available for joint occupation but

this is often not easy to achieve in the long term, the

RNRA will in some circumstances allow scope to

default to the reservation of benefit provisions.

Current will planning under which residential property

is transferred to a relevant property trust is likely to

be less popular, again due to the loss of the RNRA.

For younger individuals, simple term life insurance is a

good medium term option.

Gifts of other property pre death are likely to become

more popular in order for the estate on death to be

below £2 million, even if there is little likelihood that

the donor will survive three years. It will be necessary

to consider the capital gains tax implications.

As with much modern legislation it is a pity that a tax

relief which can be summarised in a few words is

enmeshed in such complicated provisions.

Profile

Allan is a member of the Private Wealth and Estates

Group at Saffery Champness and specialises in trust

and private client compliance and tax advisory work.

He has over 25 years’ experience, working in London,

the Channel Islands and Cambridge, with ‘big four’

accountancy firms, and in the North East with a major

law firm.

Allan acts for a number of UK and offshore trustees in

addition to a wide range of predominantly UK-based

individuals.

Allan can be contacted at allan.holmes@saffery.com

or by telephone at +44 (0)20 7841 4115.

Succession Taxes Voice | Issue 01 | April 2016 17

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Succession Taxes Voice | Issue 01 | April 2016 18

CONSULTATIONS AND SUBMISSIONS

CIOT Succession Taxes Submissions: February 2015 – present

DFB15 Clauses on Calculation of IHT on settled property

http://www.tax.org.uk/policy-technical/submissions/dfb15-clauses-calculation-iht-settled-

property-ciot-comments

04/02/2015

DFB15 Clauses on IHT Emergency Service Personnel exemption 153A IHTA 1984

http://www.tax.org.uk/policy-technical/submissions/draft-fb15-clauses-iht-emergency-service-

personnel-exemption-ciot

04/02/2015

DFB15 Clauses on calculation of IHT on settled property – follow up letter

http://www.tax.org.uk/policy-technical/submissions/dfb15-clauses-calculation-iht-settled-

property-ciot-comments

12/02/2015

Protected testamentary Disposition

http://www.tax.org.uk/policy-technical/submissions/improving-definition-protected-

testamentary-disposition-ciot-comments

26/02/2015

Disclosure of Tax Avoidance Schemes; draft Inheritance Tax hallmark regulations

http://www.tax.org.uk/policy-technical/submissions/disclosure-tax-avoidance-schemes-draft-

inheritance-tax-hallmark

10/09/2015

HMRC Review: Looking at use of Deeds in Variation for tax purposes

http://www.tax.org.uk/policy-technical/submissions/deeds-variation-tax-purposes-ciot-comments

07/10/2015

Inheritance Tax on main residence nil-rate band and downsizing proposals

http://www.tax.org.uk/policy-technical/submissions/main-residence-nil-rate-band-and-

downsizing-proposals-ciot-comments

20/10/2015

Draft Finance Bill 2016 Clause 44 Inheritance Tax - Increased nil-rate band – downsizing

http://www.tax.org.uk/policy-technical/submissions/draft-finance-bill-2016-clause-44-

inheritance-tax-increased-nil-rate

02/02/2016

Succession Taxes Voice | Issue 01 | April 2016 19

Domicile: Income Tax and Capital Gains Tax

http://www.tax.org.uk/policy-technical/submissions/domicile-income-tax-and-cgt-new-clause-

and-schedule-ciot-comments

29/02/2016

Proposals to reform fees for grants of probate

http://www.tax.org.uk/policy-technical/submissions/proposals-reform-fees-grants-probate-ciot-

comments

01/04/2016

ATT Technical submissions: January 2015 – present

DFB15 Clauses on IHT Emergency Service Personnel exemption 153A IHTA 1984

http://www.att.org.uk/technical/submissions/draft-fb15-clauses-iht-exemption-emergency-

service-personnel-att-comments

26/01/2015

HMRC Review: Looking at use of Deeds in Variation for tax purposes

http://www.att.org.uk/technical/submissions/deeds-variation-att-response

08/10/2015

Proposals to reform fees for grants of probate

http://www.att.org.uk/technical/submissions/proposals-reform-fees-grant-probate-att-comments

01/04/2016

Succession Taxes Voice | Issue 01 | April 2016 20

Future branch events

East Anglia 3 May 2016

Inheritance tax and trusts – joint meeting with STEP

North East England 12 May 2016

Capital Taxes

Suffolk 22 June 2016

Succession Planning and the Family Company - joint

conference with Essex Branch

EVENTS

Succession Taxes Voice | Issue 01 | April 2016 21

CONTACT US

To contact the Succession Taxes technical officer, John Stockdale, please email: jstockdale@ciot.org.uk

To contact Alison Ward, the ATT technical officer dealing with these matters, please email: award@att.org.uk

Editorial Team

Editor-in-chief Chris Mattos CTA ATT cmattos@ciot.org.uk

Editor Lakshmi Narain CTA lnarain@ciot.org.uk

Designer Sophia Bell sbell@tax.org.uk

© 2016 Chartered Institute of Taxation

This publication is intended to be a general guide and cannot be a substitute for professional advice. Neither the

authors nor the publisher accept any responsibility for loss occasioned to any person acting or refraining from acting

as a result of material contained in this publication.

Suggestions? If you have any suggestions for further

articles, please let us know:

technical@ciot.org.uk

Suggestions? If you have any suggestions for further

articles, please let us know:

technical@ciot.org.uk