Many Accountants and Tax Advisors will have a number of Trusts as their clients. They may or may not have known that the ‘Rule in Hastings-Bass’ referred to a legal defence Trustees could use to prevent HMRC collecting tax on steps which resulted in extra tax liabilities [NB: Those who thought the Hastings-Bass rule was to do with the offerings of a South Coast pub should read on to protect their PI insurance]. Effectively, the Hastings-Bass rule was used as a way to unwind actions which had unexpected, adverse tax effects. Essentially, it was a ‘Get out of Jail Free’ card.
Trusts are often misunderstood. They have suffered recent adverse publicity, but they can still serve valuable roles in protecting minors, the vulnerable and inter-generational family wealth. This is the reason many Trustees may only be involved in one Trust, and many Advisors will only have a few on their client list. Such diversity is helpful, in my opinion, because it keeps those most affected by the outcome closely involved in the decision making process. The underlying personal and commercial issues are generally more important, and those who are close can give a more balanced view, than just technical input. It does not stop the latter being important though.
This month the Supreme Court issued its judgement in Futter and Another v The Commissioners for HM Revenue and Customs and Pitt and Another v The Commissioners for HM Revenue and Customs. They were disparaging about the Hastings-Bass rule and Trustees claiming that they had acted in an ‘un-Trustee like fashion’ such that they should be able to void as a ‘mistake’ actions which gave rise to an unexpected tax bill. The Supreme Court compared such a defence with the lack of relief which would be due to an individual beneficial owner of property who may have made a similar mistake.
The Court Opinion is elegantly written but raises a number of potentially complex issues for advisors. Those who may be affected should read the judgement carefully. Perhaps the first thing which springs to mind though is that Trustees and Advisors need to protect their own interests (as well as the Trusts) by ensuring they have evidence of obtaining appropriate professional advice.
A series of articles highlighting key areas that affect taxpayers and practitioners involved with inheritance tax and estates and identifying opportunities to mitigate inheritance tax.
Inheritance Tax & Estate Tax Planning
Inheritance tax and estate planning is an important tool to ensure that wealth is preserved for future generations.
The nature of the planning undertaken will depend on the type and value of assets in the estate as well as the overall objectives such as who is to benefit from the assets, degree of control and distribution of income.
Examples of inheritance tax and estate planning opportunities include:
- Business Property Relief – up to 100% relief for the value of qualifying business interests, shareholdings and assets
- Agricultural Property Relief – up to 100% relief for the value of qualifying land/property used for agricultural purposes
- Woodlands Relief – up to 100% relief against the value of timber on the land, although a charge may subsequently arise if the timber is later sold
- Gifts to charity
- Making full use of allowances such as the annual allowance and gifts on marriage
- Regular gifts out of income
- Outright gifts to individuals/trusts
- Trusts for vulnerable persons
Non-UK Domicile Tax Planning
Non-UK domiciled persons are usually only subject to inheritance tax on their UK situs assets, however where a person has been resident in the UK for 17 out of the last 20 tax years they are automatically deemed to be domiciled in the UK, potentially bringing their worldwide assets within the scope of UK inheritance tax.
However, where a person sets up an offshore trust to hold overseas assets whilst non-UK domiciled/deemed domiciled, the trust will be treated as excluded property and should remain outside the UK inheritance tax net.
In certain cases, it may be possible to restructure the ownership of assets to allow assets that would otherwise be treated as UK situs to qualify as excluded property. Although care will need to be taken, particularly where the recent changes to the stamp duty land tax rules are in point.
Inheritance tax and estate planning is a complex area and advice should be sought before any planning is undertaken.
Anti-Avoidance & Other Considerations
Where inheritance tax planning is to be utilised care should be taken to ensure that the planning does not fall foul of anti-avoidance legislation such as the rules for gifts with reservation of benefit, associated operations, pre-owned asset tax etc.
It will also be necessary to consider the potential impact of the proposed planning on other taxes such as capital gains tax, VAT, SDLT and relevant anti-avoidance rules such as the settlement provisions and transfer of assets abroad.
A further key consideration will be the commercial and practical aspects of the planning – in our experience bespoke advice that is tailored to the individual’s precise circumstances is more likely to achieve the desired result than one size fits all schemes.
With the end of the tax year 2010/11 fast approaching there are several opportunities that will be gone come 2011/12.
Here are some of these opportunities:
- Pension Contributions: As of 6 April 2011 the annual allowance for pension contributions will be reduced to £50,000 as opposed to the £255,000 in 2010/11. If you are considering making lum sump contributions to a scheme then it is important to take advice as soon as possible because other factors may affect your planning
- Trusts & Estates: There is still a possibility for Capital Gains taxable on the settlor to be charged at the old rate of old rate of 18% even if the gains are realised after the 23 June 2010.
- National Insurance Contributions: With an increase of 1% due in 2011/12, a bonus paid before the end of the tax year will make an effective saving, compared to the bonus being later.
If you require any help with your tax planning, please contact Eaves & Co at either our Leeds or Southport offices for an initial consultation.