Terry Baucher of Baucher Consulting (www.baucherconsulting.co.nz) discusses the recent developments on Inheritance Tax and the potential implications these could have for Trust and Estate Practitioners. Baucher provides a re-introduction to Inheritance Tax, how Inheritance Tax influences Trusts and the tax issues around Trusts before concluding with the latest developments in the area of Inheritance Tax. Baucher presented this presentation in July 2013.

1. Inheritance Tax -
Overview & Recent Developments
Society of Trust and Estate Practitioners
3rd July 2013
Terry Baucher, Baucher Consulting Ltd

2. Summary of Session
1. Introduction to Inheritance Tax
2. Trusts and Inheritance Tax
3. Latest developments

3. 1. Introduction to Inheritance Tax

4. "Inheritance Tax is, broadly speaking,
a voluntary levy paid by those who
distrust their heirs more than they
dislike the Inland Revenue."
•Roy Jenkins MP,1986

5. Inheritance Tax – Why?
•Three groups potentially affected by IHT
 New migrants from the UK, particularly within
three years of arrival
 Anyone with assets situated in the UK
 Anyone who has spent more than 15 years in
the UK recently

6. Inheritance Tax - Background
 1894 Estate Duty introduced
 1975 Capital Transfer Tax replaces Estate Duty
 1986 CTT “Rebranded” as Inheritance Tax
 Inheritance Tax Act 1984 (“IHTA”) main legislation

7. Inheritance Tax – Basic Principles (1)
 IHT is a unified gift and estate tax
 Worldwide estate of any person who was
domiciled in the UK at time of death subject to IHT
 Value of estate includes any lifetime gifts made
within 7 years of death
 Certain lifetime transfers may be subject to IHT
 Also applicable to all UK situated assets held by
non-UK domiciled person

8. Inheritance Tax – Basic Principles (3)
 IHT applies at 40% on the value, in excess of nil rate
band (£325,000), of person’s estate
 Rate drops to 36% if 10% or more of estate gifted to
charities
 20% rate applies to lifetime chargeable transfers in
excess of nil rate band

9. Inheritance Tax – UK situated property
 Sec 6(1) IHTA, Property situated outside the United Kingdom is
excluded property if the person beneficially entitled to it is an
individual domiciled outside the United Kingdom
 Property situated in the UK NOT “excluded property”
 Property held in UK subject to IHT includes:
 Real property
 Bank deposits
 Shares in UK incorporated companies
 Pension funds
 Other assets physically located in the UK (e.g. artworks,
jewellery)

10. Inheritance Tax – Domicile (1)
 Domicile crucial to determining whether IHT will
apply and what reliefs are available
 Separate concept from tax residence (although
residency can have some bearing on domicile)
 Domicile determined by common law principles

11. Inheritance Tax – Domicile (2)
 Everyone has domicile of origin (father’s domicile if
legitimate otherwise mother’s)
 For UK purposes domicile of origin is never lost,
other than by adoption
 Technically, domicile of origin is temporarily
suspended when domicile of choice adopted

12. Inheritance Tax – Deemed Domicile
Section 267 IHTA a person not domiciled in the UK at
“the relevant time” will be treated as domiciled in the
UK if-
a)The person was domiciled in the UK within the three
years immediately preceding the relevant time; or
b)The person was resident (for UK income tax
purposes) in the UK for 17 of last 20 tax years

13. Inheritance Tax
Continuing Domicile - UK Domiciled
 1 September 2010 a UK domiciled person migrates
to New Zealand
 Under Section 267(1) IHTA if person dies before 1
September 2013 then still UK domiciled and
worldwide estate subject to IHT

14. Inheritance Tax
Deemed Domicile – Non UK Domiciled
5 April
2011
End deemed
domicile
Arrives
in UK
1 July
2010
5 April
2012 (1)
5 April
2013 (2)
5 April
2014 (3)
Three full UK tax years must pass
6 April
1993
Returns
to NZ

15. “Just when I thought I was out… they pull me back in”

16. Inheritance Tax – Exemptions (1)
 Principal exemption is £325,000 nil rate band
 From October 2007 unused balance transferrable
to spouse/civil partner
 Unlimited transfers between spouses and civil
partners – if BOTH are UK domiciled or BOTH are
non UK domiciled
 If one spouse/civil partner not UK domiciled
transfer limited to nil rate band (£325,000)

17. Inheritance Tax – Exemptions (2)
 £3,000 annual exemption per tax year
 Unused balance from prior tax year may be used
in subsequent year e.g. Aaron gifts £1,100 in 2012-
13, balance of £1,900 may be used in 2013-14 year
 £250 small gift exemption (unlimited)
 Value of agricultural property and business assets,
including unlisted shares, can qualify for either 50%
or 100% reduction in value

18. Inheritance Tax – Exemptions (3)
Potentially Exempt Transfers
 Lifetime gift of any amount may be exempt from
IHT if donor survives more than seven years after gift
 If donor dies within seven years gift included in
estate but tax payable may be reduced
depending on period lapsed since gift
 A gift with reservations (for example giving house to
children but continuing to live in it) not PET

19. Inheritance Tax – Potentially Exempt Transfers
Number of years after gift
made
•0 – 3 years
•3 – 4 years
•4 – 5 years
•5 – 6 years
•6 – 7 years
•7 or more
•0%
•20%
•40%
•60%
•80%
•100% (fully
exempt)
Percentage Reduction
in tax charge

20. 2. Trusts and Inheritance Tax

21. Trusts and Inheritance Tax (1)
 Highly complicated area – proceed with caution.
 Until March 2006 distinction between discretionary
trusts and interest in possession (“IIP”) trusts. Latter
had more beneficial IHT treatment (e.g. gifts to IIP
trusts not subject to 10 year charge).
 From March 2006 all transfers into discretionary and
IIP trusts are treated as a lifetime chargeable
transfer (exceptions for transfers to 18-25 trusts and
trusts for bereaved minors).

22. Trusts and Inheritance Tax (2)
 From 2006 most trusts are subject to 10 year periodic
charge - roughly 6% of trust fund above nil rate band
 IHT exit charge on assets transferred out of trust
(again @6% of value of assets transferred)
 IHT will apply to ALL trusts settled by UK domiciled
person regardless of where assets situated and
subsequent domicile status
 Value of IHT collected in 2011-12 from discretionary
trusts and number of trusts affected:
 £74.3 million from 573 trusts

23. Trusts and Inheritance Tax
Periodic Charges – example
 Samit settled trust (“the No. 2 Trust”) on 18 April 2002
 £350,000 added to the No. 2 Trust held equally in two
separate funds, one discretionary (“relevant
property”), the other an interest in possession (“non-
relevant property”) for Samit’s aunt
 Previously settled £175,000 on another discretionary
trust in September 2000
 Value of relevant property in the No.2 Trust on 18 April
2012 was £250,000

24. Trusts and Inheritance Tax
Periodic Charges example
•Current value of relevant property
•Historic value of non-relevant property
•Total subject to charge
•Less Nil-rate band (net of September 2000 gift)
•Value to determine rate of tax
•Tax at 20% (lifetime rate)
•Initial rate of tax (55,000/425,000)
•Ten yearly charge rate (30% of initial rate)
•Tax payable £250,000 @ 3.882%
•£
•250,000
•175,000
•425,000
•-150,000
•275,000
•55,000
•12.941%
•3.882%
•£9,705

25. Trusts and Inheritance Tax
Exit Charge – example
 Samit settled trust (“the No. 2 Trust”) on 18 April 2002
 £350,000 added to the No. 2 Trust held equally in two
separate funds, one discretionary (“relevant
property”) other interest in possession (“non-relevant
property”) for Samit’s aunt
 Previously settled £175,000 on another discretionary
trust in September 2000
 Distributed £100,000 on 6 June 2007 (the nil-rate band
for that year was £300,000)

26. Trusts and Inheritance Tax
Exit Charge - example
•Historic value of relevant property
•Historic value of non-relevant property
•Total subject to charge
•Less Nil-rate band (net of September 2000 gift)
•Value to determine rate of tax
•Tax at 20% (lifetime rate)
•Initial rate of tax (45,000/350,000)
•Exit charge rate (30% of initial rate)
•Tax payable £100,000 @ 3.857%
•As only relevant property for 20 quarters tax reduced
to 20/40 x £3,857
•£
•175,000
•175,000
•350,000
•-125,000
•225,000
•45,000
•12.857%
•3.857%
•£3,857
•£1,928

27. Trusts and Inheritance Tax – “Pilot Trusts”
 Based on decision in Rysaffe Trustee v IRC [2003] STC 536
 Charles has 7 grandchildren and settles £100 on 7
separate trusts settled on successive days
 Charles’ will leaves £250,000 after IHT to each trust
 On Charles’ death his estate will be subject to IHT. But
each trust will benefit from its own nil-rate band and the
trusts will not be treated as related. So long as the value
of the settled property remains below the nil-rate band
no periodic or exit charges payable.

28. Trusts and Inheritance Tax
 Possible for a non-domiciled settlor to establish
trusts outside IHT so long as trust resident outside UK
and all trust assets situated outside UK
 But… UK income tax charge can arise on “pre-
owned assets” where donor can has continued
enjoyment of asset
 Note also potential issues around gifts with
reservation. Could be an issue if a settlor is a
beneficiary

29. 3. Recent Developments

30. Recent Developments (1)
 Supreme Court decision in Futter & Anor, Pitt &
Anor v HMRC
 New general anti-avoidance provision
 Specific measures targeting non-UK domiciliaries
holding high value property in the UK
 Changes to rules regarding non-UK domiciled
spouses

31. Recent Developments (2)
 Supreme Court decision in Futter & Anor, Pitt &
Anor v HMRC [2013] UKSC 26
 “Increasingly strong and general recognition that
artificial tax avoidance is a social evil”
(Lord Walker Para 135)
 UK is introducing anti-avoidance provision or
“General anti-abuse rule”
 Some commentators have picked up on Penny-
Hooper decision and are concerned at
implications for UK tax advisors

32. Recent Developments (3)
Anti-avoidance measures effective from April 2013
targeting residential property worth over £2 million owned
by non-natural persons:
 15% stamp duty land tax payable on acquisition;
 An annual tax on enveloped dwellings (ATED) ranging
from £15,000 to £140,000 on properties worth more than
£20 million;
 CGT at 28% payable on disposals of high value
residential property on or after 6 April 2013.
In addition there are further restrictions on the
deductibility of debt which finances excluded or
relievable property.

33. Recent Developments (4)
 Inter-spouse transfer exemption where the donor
spouse is UK domiciled but the recipient is not
increased to £325,000 and linked to future
increases in the nil-rate band from 6 April 2013
 Also from 6 April 2013 a non-domiciled spouse
may elect to be UK domiciled and may therefore
benefit from the inter-spouse transfer exemption
 Election is generally irrevocable although it will
laps if the person making it is subsequently not UK
resident for four successive tax years

34. The Trust is dead. Long live the Trust?
 Possible for a non-domiciled settlor to establish
trusts outside IHT so long as trust resident outside UK
and all trust assets situated outside UK
 Still opportunities to use trusts either through
transfers under nil-rate band or which have specific
IHT exemption
 The use of trusts has been greatly circumscribed for
IHT planning purposes but reports of their death are
much exaggerated

35. Conclusions
 New migrants from UK have exposure to IHT for up
to three years after arrival, longer if retain links
 Returning New Zealanders are also exposed either
on basis of retained assets in UK, or deemed
domicile (rare)
 Pre-migration planning for UK domiciliaries requires
great care because of capital gains tax issues and
risk of triggering a lifetime IHT charge
 IHT issues manageable but keep an eye on clock

36. For further information please contact Terry Baucher
09 486 6200
terry@baucherconsulting.co.nz
Questions?