Inheritance Tax and Trusts: HMRC registration rules are changing – what does this mean to you? | Personal Finances | Finance

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Inheritance Tax (IHT) bills are treated differently if the assets are held in certain types of trusts and although not all trusts protect families from tax, there are cases where the IHT will be reduced. Recently, the HMRC updated the rules on trusts, which Richard Bate, a partner at the national law firm Weightmans, says can result in costs for trustees, defined as the legal owners of assets held in a trust.

Are you ready for more admin?

Mr. Bate explained that in addition to general legal obligations, trustees dealing with a trust have a legal obligation to comply with various HMRC reporting requirements. Unfortunately, trustees are now facing more pressure due to the change in registration rules.

Due to regulations passed in early 2021, it is now mandatory for most trusts to register with HMRC’s trust registration service, even if the trust does not need to pay tax.

An extension to the registration system has “recently been put into operation” and administrators must ensure that their trust is registered by September 2022 at the latest. Failure to do so could result in sanctions against the Trustees.

Specifically, under the new Fifth Money Laundering Directive (5MLD), all UK trusts, except those that meet specific exemption criteria, must be registered with HMRC and Mr. Bate went on to examine what this means for families.

READ MORE: HMRC collects record amounts of IHT from Brits – what can you do?

Which trusts need to be registered and what do the changes mean for the trustees?

Mr Bate said: “All UK express trusts are required to register, unless they fall under one of the specific exclusions set out in the regulations. The exclusions include charitable trusts, pension trusts, trusts referred to as ‘Disability Trust’ and ‘Pre-2020 Pilot Trusts’ holding less than £ 100.

“Trusts with life insurance policies and co-owner property trusts probably won’t need to register, but specific criteria apply, so it’s worth checking with your professional advisor. All other trusts must be registered, including those that only hold small amounts. If in doubt, seek professional advice. “

Even when administrators don’t need to pay tax, they will still need to register with HMRC and they could be caught off guard if that is missed.

Mr Bate continued: “This introduces an additional administrative burden for trustees, with new considerations, and means they are required to register with the TRS even though their trust does not need to pay tax. And even those who have previously registered a trust may now need to provide more information than before in order to comply with current reporting requirements.

“The window for new registrations and submissions is open until September 2022 – and failure to submit the correct documentation could result in fines of over £ 300 for administrators.”

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What will be the impact of these changes on inheritance tax?

Many people can assume that by placing their assets in a trust, they will be “outside” their estate. This in turn would limit the size of the estate during the IHT assessment process. Currently, IHT is levied on estates valued at over £ 325,000.

However, this is an oversimplification, as Mr Bate continued: “Trusts are a useful tool for managing your wealth, both throughout your life and upon your death, helping you to gain more control over what happens to your assets and how they may be The tax treatment of trusts is complex and there is a persistent misconception that trusts themselves are exempt from inheritance tax – except in certain circumstances it is unlikely to be the case.

“These new regulations do not change the fact that trusts are subject to continuous tax reporting at various stages of their life cycle – during creation, during trust administration and during liquidation. Trusts can be subject to various taxes, including inheritance tax, income tax, and other forms of taxation. The specific requirements depend on the type of trust it is and the value of its assets.

“For example, if you are a trustee of a discretionary trust, you will likely have to pay taxes and file an inheritance tax return on the tenth anniversary of the creation of the trust, as well as whenever funds are paid to the trust. a beneficiary. Trustees should always seek professional advice to ensure that their reporting – and tax – obligations are met, and to avoid falling into the trap of thinking that assets in trust are exempt from inheritance tax.

What should the trustees do differently?

For those Trustees who are affected by these changes, Mr. Bate concluded on what needs to be done.

“It is the trustees of express trusts – such as those created to give money in the form of gifts or loans – who need to be most aware of their new reporting obligations,” he said.

“While they are generally not subject to tax until funds are withdrawn, they must now be registered with the TRS.

“As a general rule of thumb, directors should continually check whether their trust has to file annual income tax returns with HMRC, even though they don’t have to pay tax and have nothing to report. a filing requirement, new regulations mean that this is no longer the case; it is squarely incumbent on the trustees to act and brief their advisers as needed.

“Documenting all actions taken with respect to a trust is essential to helping the trustees ensure compliance, and perhaps even more important to being able to prove it if the trustees were ever challenged or criticized. Disbursement of funds from a trust fund, for example, should be formally documented, and decisions about the management of a trust fund should be carefully noted after regular directors’ meetings.

“Our advice to any trustee is to hire a professional advisor – the cost of which is a legitimate expense of any trust fund – to ensure that they have all the tools and knowledge to effectively manage their trusts and in accordance with the news. regulations.”

Relevant property

While it is advisable to seek professional help for trusts, advice on the rules can be found on the government website. Additionally, unbiased advice can be sought from Money Helper and Citizens Advice.

Currently, government rules detail what assets held in trusts such as money, stocks, houses or land are called “relevant property”. Most property held in trusts counts as relevant property and the IHT may be owed on assets held in a trust when:

  • They are transferred out of a trust (exit fees)
  • A 10-year anniversary occurs

The “only” exceptions to this rule are when the asset is:

  • In an interest trust in possession and placed there before March 22, 2006
  • Subject to a “transitional series interest” effected between March 22, 2006 and October 5, 2008
  • Investment in an interest trust in possession by the terms of a will or the rules of intestate succession
  • Book for a disabled person
  • Set aside for a bereaved minor
  • Put yourself in an “18 to 25 year old confidence”

Typically, the IHT for most types of trusts is due when a person makes transfers that total exceed the inheritance tax threshold of £ 325,000.


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